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Hungary Is ‘Puzzling’ Because of Policies, Goldman Sachs Says

Hungary is eastern Europe’s “most puzzling investment case” with assets trading at the biggest discount to fair value in the region because of the government’s economic policies, economists at Goldman Sachs Group Inc. said.

Prime Minister Viktor Orban’s government has refused to commit to a budget deficit target for 2011, citing the need to spur economic growth after the worst recession in 18 years. Talks with the International Monetary Fund and European Union on a review of Hungary’s 20 billion-euro ($26 billion) bailout broke down July 17, and the government said last week it wouldn’t seek a new loan when talks resume in October.

“Hungary continues to be the most puzzling investment case,” Ahmet Akarli and Magdalena Polan of Goldman Sachs in London said in a Sept. 1 note. Its “assets trade exceptionally wide relative to our fair-value estimates, reflecting the uncertainty created by the new Fidesz government’s reluctance to commit to strong, credible economic policies.”

The forint has lost 1.2 percent against the euro in the past month, compared with gains of 4.5 percent for the Czech koruna and 0.35 percent for the Polish zloty. Hungary’s credit default-swaps, contracts that protect against default, averaged 329 basis points in the period versus 88 basis points for the Czech Republic and 135 for Poland.

Hungary is eastern Europe’s most-indebted nation, with government debt equal to 78.3 percent of gross domestic product last year. While the government has committed to cutting its budget deficit to 3.8 percent of GDP this year, it balked at a 2011 target of 2.8 percent.

“Hungary’s fiscal position looks unsustainable without continued fiscal discipline and structural measures that would stabilize, and ideally reduce, the sovereign debt stock,” the Goldman Sachs economists said. “After a costly period of trial and error, the Fidesz government will eventually re-engage with the IMF and the EU,” they said, referring to Orban’s party.

Mending relations with the IMF would strengthen the forint, prompt a decline in bond yields and compress Hungary’s CDS spreads, they said. The 2011 budget and a new fiscal plan will be “a litmus test,” according to Akarli and Polan.

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