Hungary's Deficit-Cutting Steps Stem `Panic,' Need Specifics, Analysts Say
Hungarian Premier Viktor Orban should swiftly release the fine print of his deficit-cutting plan to regain the trust of investors after averting a market rout with proposals today, said analysts at ING Groep NV, UBS AG and Budapest Investment Management.
Hungary, which roiled world markets last week when government officials talked of a potential default, plans to introduce a special tax on banks, cut public spending, reduce the personal income tax and slash the corporate income tax, Orban told lawmakers in Budapest today. The country has pledged to stick with its creditor-approved budget deficit target.
The forint rose and government bond yields fell after Orban announced the measures, hammered out in a three-day emergency cabinet meeting after the currency dropped 4.8 percent in two days last week. Hungary will need to show sustained savings to investors, as well as the European Union and the International Monetary Fund, which led a bailout of the country in 2008.
“It will be enough to stop the panic, it will be enough for some time, but markets and the EU and IMF will want more details,” David Nemeth, an economist at ING Groep NV, said in a phone interview.
The forint gained as much as 1.8 percent today and traded up 0.4 percent at 284.86 per euro at 4:40 p.m. in Budapest. The yield on the benchmark three-year bond fell to 6.752 percent from 7.037 percent. The benchmark BUX stock index fell 0.3 percent, declining for a fourth day.
Hungary’s domestic politics roiled global markets last week as officials in Orban’s week-old government compared the country to Greece while claiming the previous administration lied about public finances. The comments fed concerns Europe’s sovereign debt crisis was spreading, weakening the forint and pushing the euro to its lowest level in four years.
Orban was elected in April on a wave of discontent with the previous ruling party, which four years ago scrapped plans to cut taxes and reduced spending to narrow the budget deficit. Orban pledged to end five years of austerity with his election.
“We must simultaneously keep the financial situation under our control and continue to march toward the goals set by voters,” Orban said in a speech in Parliament today.
Hungary wants to tap the financial industry for 200 billion forint ($845 million) this year, compared with a planned 13 billion forint, and save 120 billion forint with a public- spending freeze and by overhauling state wages, Orban said. Foreign-currency mortgages will also be banned.
The country will reduce salaries at state-owned companies and cap earnings at government institutions, including the central bank. The government needs to save between 1 percent and 1.5 percent of GDP to meet the deficit target, Economy and Finance Minister Gyorgy Matolcsy said in Luxembourg yesterday.
Orban also proposed introducing a flat, 16 percent personal income tax as of next year and reducing the corporate income tax for companies with less than 500 million forint in annual profit to 10 percent from 19 percent. The government also plans to scrap 10 so-called small taxes.
“Orban’s message is positive but he didn’t detail the painful measures awaiting the public sector,” Daniel Bebesy, who helps manage $1.5 billion in mostly Hungarian government bonds at Budapest Investment Management, said in a phone interview. “We remain underweight and are awaiting policy measures that demonstrate how exactly the cabinet plans to meet its deficit goal.”
Orban’s cabinet reversed course this past weekend, dropping a campaign to convince creditors to allow the budget deficit to widen. Instead, he will focus on immediate measures to meet the 3.8 percent of gross domestic product deficit target agreed with the IMF and the EU, which led a 20 billion-euro ($24 billion) bailout to save Hungary from default in 2008.
Hungary reduced its budget gap to 4 percent last year from 9.3 percent in 2006, the widest in the EU at the time, to meet the terms of the loan.
IMF Managing Director Dominique Strauss-Kahn yesterday rejected speculation that Hungary is in danger of default, adding there is no “element of fear” regarding the country. EU Economic and Monetary Commissioner Olli Rehn said the earlier default speculation was “wildly exaggerated” after the previous government made strides to pare its budget deficit.
The cabinet will now need to flesh out policies and obtain the backing of the IMF and the EU, before a sustained rally can take place in local assets, Manik Narain, a London-based UBS AG analyst, said in a note to clients.
“For now, this is enough to douse the fires after last week’s panic reaction to some unhelpful comments,” Narain said. “We expect risk premium to stay elevated until more clarity on rapprochement with the EU and IMF comes through, given Fidesz’s reduced credibility, risks of further populist rhetoric and considerable implementation risks.”