IMF Ready To Expand Loan Facility To Hungary

Recent developments

An IMF delegation, together with European Commission experts, visited Hungary between May 7 and 18 to consult with economic policymakers on the way Hungary has been using the credit package and tasks ahead. On this occasion, Hungary has been given an opportunity to raise its 2009 fiscal deficit target from 2.9% to 3.9% of GDP.

Since then, authorities and staff have intended to revisit the external financing outlook for 2010 and 2011 later in the year, and, if necessary, discuss the need for a possible extension and augmentation of the program. Portfolio.hu calculations last week indicate that this will be indeed necessary as Hungary will likely deplete the loan in late 2010 if the global financial market environment remains unfavourable.

Underpinning investor confidence

According to the new report, IMF believes a reduction of fiscal deficit from this year's 3.9% to 3.8% of GDP next year is a key factor in boosting investor confidence. Back in May, the delegation saw a need for a fiscal consolidation package on a scale of 0.5% of GDP in order to meet the 2010 deficit target.

IMF staff called for specific government strategies in order to underpin efficiency gains at the local government level and reduce subsidies to state-owned railway company MÁV. These comments, as well as the recommended degree of adjustment (0.5% of GDP), are perfectly in line with the late May inflation report of the National Bank of Hungary.

The report states that the Monetary Council has taken the right course of action when it left the benchmark rate unchanged since January. Further strengthening of investor confidence, and a corresponding easing of financial stability strains may create room for interest rate cuts, IMF concluded."

Source: Portfolio Online Financial Journal