Hungary's $1.8 Billion of Temporary Taxes Delay `Painful' Cuts
Hungarian Prime Minister Viktor Orban’s decision to reduce the budget deficit through temporary taxes delays the pain of tackling eastern Europe’s highest debt.
The government said yesterday it will impose levies on energy companies, telecommunications operators and retail chains. The taxes, together with a previously announced bank levy, will raise 343 billion forint ($1.76 billion), or 1.4 percent of economic output, annually for three years.
The plan provides the first detail on how Orban will meet pledges to cut the deficit after roiling markets with plans to widen the gap to help Hungary recover from its worst recession in 18 years. After winning two-thirds of the seats in parliament in April and a landslide victory in local elections this month, Orban had a chance to overhaul the economy, said David Oxley, an emerging-markets economist at Capital Economics in London
“It’s shirking the opportunity to do proper and further reaching reforms,” Oxley said. “They could have turned their back on populist measures and taken the painful steps that will improve the sustainability of public finances.”
Hungary’s government debt will be 78.9 percent of gross domestic product this year, the highest among the European Union’s eastern members, according to the European Commission.
Orban, 47, promised last month to reduce the budget deficit to 3.8 percent of GDP this year and less than 3 percent in 2011, after falling out with the EU and International Monetary Fund and over the same targets in July. The EU and IMF saved Hungary from default with a 20 billion-euro ($28 billion) bailout loan in 2008.
The new taxes will raise 70 billion forint from the energy industry, 61 billion forint from telecommunications and 30 billion forint from retailers each year, according to Cabinet estimates. The government will also withhold transfers of social security payments to private pension funds for one year, saving 30 billion forint a month from Nov. 1.
Orban will submit his full economic plan, which may contain further measures, on Monday.
The forint traded at 272.03 per euro at 10:17 a.m. Budapest from 274.26 on Oct. 12, before the announcement. Magyar Telekom Nyrt. fell 2.1 percent and oil refiner Mol Nyrt. declined 0.1 percent.
“At least the cat is finally out of the bag and the fixed- income market should be relatively happy,” Simon Quijano-Evans, head of emerging-market strategy at Credit Agricole Cheuvreux in Vienna, wrote in an e-mail. “The move opens the door for more central bank rate cuts.”
The Magyar Nemzeti Bank held its benchmark two-week deposit rate at a record-low 5.25 percent on Sept. 27, leaving it unchanged for a fifth month. The government’s budget pledge improved Hungary’s risk assessment and changed the stance of policy makers who had pushed for higher rates, central bank President Andras Simor said after the decision.
Companies are likely to pass the taxes on to consumers, crimping domestic demand and economic growth after retail sales snapped a 41-month decline in July, said Gyula Toth, emerging- market strategist at UniCredit SpA in Vienna. The IMF forecasts the economy will expand 0.6 percent this year, after shrinking 6.3 percent in 2009.
“People will also feel the effect of these measures, albeit not as quickly as a value-added tax increase” Toth said. “The deficit goal seems to be achievable nominally, but I don’t like the details.”
Hungary sparked investor concern in June when leaders of Orban’s Fidesz party compared the country to Greece and claimed the previous administration had lied about public finances, triggering declines in the currency and bonds.
‘Clearly a Risk’
The forint has surged 5.4 percent since Sept. 8, when Hungary committed to next year’s deficit target, the best performance among more than 170 currencies tracked by Bloomberg. The yield on the country’s benchmark five-year bond fell to 6.429 percent yesterday from 6.489 percent.
Orban’s budget plan may not be enough to sustain the gains, said Benoit Anne, head of global emerging markets at Societe Generale SA.
“The quality of the fiscal adjustment is an issue,” he said yesterday in an e-mail. “The government may deliver on quantity, but there is clearly a risk that investors aren’t convinced by the government’s approach. I don’t see much in terms of spending control.”
Standard & Poor’s lowered the outlook on Hungary’s BBB- credit rating to negative in July and a one-step cut would reduce the grade to junk for the first time since 1992. Moody’s Investors Service is also reviewing Hungary’s credit grade, though it rates the country Baa1, two steps higher than S&P.
The measures announced today may not be enough to convince credit evaluators that Hungary’s economy is on a new track, Pasquale Diana, an emerging-markets economist Morgan Stanley & Co. in London, said yesterday in a research note.
“If the idea was to stick to the budget target for 2011 by trying to fill the 300-400 billion forint ‘hole,’ these new taxes should go a long way,” he said. “We don’t think either the rating agencies or the central bank will be impressed with measures which are anti-growth and temporary.”
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