Orban Casts Doubt on IMF Deal in Bid to Exit EU Fiscal Curbs
Prime Minister Viktor Orban cast doubt on Hungary’s prospects for an International Monetary Fund loan as he visited Brussels to persuade officials to free his government from European Union budget shackles.
The chances of agreeing on a flexible credit line from the Washington-based lender are diminishing, Orban said during a one-day trip to the Belgian capital. He met European Commission President Jose Manuel Barroso, EU President Herman van Rompuy and European Parliament President Martin Schulz.
Hungary’s aid talks with the IMF, started as the forint plunged to a record low and the country’s debt was downgraded to junk, have stalled after more than 1 1/2 years. The government must borrow the equivalent of 19 percent of economic output this year, making its financing needs the highest in eastern Europe, Moody’s Investors Service said Jan. 28.
Hungary’s IMF negotiations are “coming to an end, but not with the result we desired,” Orban said today in a speech at the Bruegel Institute, vowing to maintain his country’s request for a flexible credit line until the IMF issues a final decision. “We don’t need a loan because we’d like to be financed from the market. We’ll go out to the market again probably this month or the beginning of next month.”
The forint has fallen 1.7 percent against the euro in the last month, driven by investor anxiety over Hungary’s economic outlook and changes in the management of the central bank as the mandates of Governor Andras Simor and his two deputies expire.
Orban is trying to convince EU officials to allow Hungary to exit the bloc’s excessive-deficit procedure, which curbs spending and may trigger a freeze in development funds. The procedure has been in place since Hungary joined the EU in 2004 and would affect state expenditure before elections next year.
The EU “encourages” Hungary to pay “closer attention” to the quality of fiscal measures it enacts while it “welcomes” the government’s commitment to keep the shortfall below the EU ceiling of 3 percent of gross domestic product, Barroso told a news conference after meeting Orban. The commission will publish an assessment of recent fiscal measures on Feb. 22, he said.
To keep the budget gap within the bloc’s limit, Orban has implemented measures he calls “unorthodox” that have sapped investment, eroded confidence and helped spark a second recession in four years. The EU this week called his budget policies unsustainable.
The Cabinet is targeting a gap of 2.7 percent of gross domestic product this year and 2.2 percent in 2014. Hungary should be released from the excessive-deficit procedure because economic growth will quicken in 2014 and 2015, while state debt will shrink, Orban said, calling this year’s goals “realistic” and rejecting the need for further fiscal measures.
The commission, the EU’s executive arm, is less optimistic, predicting Nov. 7 that the shortfall will widen to 3.5 percent next year after remaining within the 3 percent limit in 2013.
If current government policy is maintained, Hungary will probably overshoot its deficit targets through 2015 and needs a shift toward sustainable fiscal consolidation as well as measures to boost economic growth, the IMF said Jan. 28. The shortfall may be 3.25 percent this year and more than 3 percent in 2014 and 2015, it said.
Hungary should take additional steps to keep its budget gap below 3 percent of GDP in a “durable and balanced manner,” the EU said in a Jan. 28 report. Corporate tax increases would harm the economy in the medium and longer term, it warned.
Orban, who visits Russia tomorrow for talks with President Vladimir Putin, is gearing up for 2014 elections with diminished support. His party, Fidesz, had 19 percent backing among eligible voters, according to an Ipsos poll published Jan. 22 by state news service MTI. It still leads the Socialists, who have 16 percent. No margin of error was given.
Measures implemented by Orban include the effective nationalization of private-pension fund assets, retroactive industry taxes, levying the highest bank tax in Europe and curtailing the power of the judiciary.
Hungary’s recession extended into the third quarter as austerity measures hurt domestic demand. GDP shrank 0.2 percent in July-September from the previous three months, a third consecutive quarterly decline, and fell 1.5 percent from a year earlier.
The new central bank chief should “bravely use unorthodox tools” to provide monetary stimulus, Matolcsy, the favorite to take over at the central bank, according to the Index news website, said last month. Simor’s successor will be named a day before his mandate expires on March 2, Orban said today.
The prime minister has had mixed success in appealing for EU leniency. While he failed in 2010 to win backing for a wider budget deficit, an April 2012 meeting with Barroso helped clear the way for Hungary to start IMF talks.
“Based on the risks to the fiscal outlook, we do not expect the European Commission would lift the excessive-deficit procedure in 2013 but the government will likely take further corrective measures to avoid any sanctions, most likely at the expense of the corporate sector,” Eszter Gargyan, a Budapest- based economist at Citigroup Inc. said in an e-mailed report.
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