Oct. 4 (Bloomberg) -- Hungarian Prime Minister Viktor Orban swept local balloting yesterday, freeing him from electoral pressures until 2014. Now he can turn his attention to budget concern that has put the country’s credit-rating at risk.
Orban’s Fidesz party captured the Budapest mayor’s office for the first time, mayoral positions in 22 of the 23 biggest cities and all 19 county assemblies, according to the national election commission. The Socialists, which lost control of the national government in April, won one major city, Szeged.
“Fidesz now faces a three-year election-free period, logic dictates that they should carry out all the necessary and difficult steps,” said Janos Samu, and economist at Budapest-based brokerage Concorde Zrt. “They don’t have to worry about their popularity for at least two years.”
Investors have bet that Orban will move ahead with budget cuts they’ve waited for during four months of battles with the European Union and the International Monetary Fund.
The forint has gained 5.3 percent against the euro, the best performance among 25 emerging market currencies tracked by Bloomberg, since Sept. 8, when the Cabinet committed to the 2011 budget-deficit target set in Hungary’s 2008 international bailout. The currency gained 0.5 percent to 272.30 by 1:30 p.m. in Budapest, the strongest since Orban took power on May 29.
Orban will have to spell out how he will reach that goal to sustain the gains.
‘Will Be Difficult’
“We all know that the difficult part is yet to come and we need the help of everyone in this country,” Orban said late yesterday on public television. “It makes no sense to delude ourselves. It will be difficult.”
Orban won two-thirds of the seats in parliament during April elections in which he promised to end five years of austerity and spur economic growth after Hungary’s worst recession in 18 years.
Domestic politics have put Orban in conflict with investors since the parliamentary campaign, when he accused his predecessor of lying about the budget. The government surrendered to EU pressure on Sept. 8 and accepted the previous Cabinet’s commitment to reduce the shortfall to less than 3 percent of gross domestic product next year.
“I expect the government will pencil in expenditure-side measures for 2011, however they seem to want to achieve next year’s budget target primarily by boosting revenues,” Gyorgy Barta, an economist at Intesa SanPaolo SpA in Budapest, said by phone. “And this is exactly what credit rating agencies and the EU won’t like.”
Credit Rating Threat
The deficit pledge hasn’t removed the threat to Hungary’s credit rating because the government hasn’t clarified its economic policies, Standard & Poor’s and Moody’s Investors Service said Sept. 15.
S&P lowered the outlook on Hungary’s BBB- rating to negative in July and a one-step cut would reduce the grade to junk for the first time since 1992. Moody’s is also reviewing Hungary for possible downgrade, though it rates the country Baa1, two steps higher than S&P.
“The risk of a downgrade by S&P is present, although it’s mostly a medium-term risk,” Barta said. The structure of the 2011 budget will be “decisive” for the assessment of Hungary’s economic risk and the nation’s credit rating, he said.
Credit-default swaps on Hungary’s bonds surged to a one-year high of 410.24 basis points on June 4 after ruling-party officials said the previous government had put Hungary at risk of a Greece-like crisis. The cost of insuring the nation’s debt fell to 301 basis points today, the lowest since July 21, according to data provider CMA.
The government raised 65 billion forint at a sale of six-week Treasury bills today, more than the initially planned 50 billion. Bids totaled 251.3 billion forint, according to results on the debt management agency’s Bloomberg page.
Hungary will “absolutely, definitely” meet its deficit targets, Economy Minister Gyorgy Matolcsy said on Oct. 1 after the government revised the 2009 budget gap figure to 4.4 percent of GDP from 4 percent.
The wider deficit is “unpleasant, but not scary,” Matolcsy told reporters last week in Brussels. “It can be sorted out with higher revenues. We rule out austerity measures. I’m optimistic about the outcome of the whole budget issue.”
Both Samu and Barta said they expect the government to cut spending by revamping the public administration and local council systems.
“If they didn’t plan any measures to cut spending they wouldn’t have had to be so secretive,” Barta said.
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