No Euro For Hungary Before 2015-16 At The Earliest

"The coming year will reveal how much political capital the governments of the CEE region are willing to spend to bring their fiscal balances back into line with the 3% of GDP Maastricht criterion, amid a crowded election schedule," GS said in a research note dated 17 December.

The European Central Bank (ECB) rejected calls at the height of the crisis for accelerated euro adoption for the Central and Eastern European region, and Goldman Sachs still expect the European Union to demand "strict adherence to the Maastricht criteria from the new members."

Countries that already peg to the euro may be ready to join the EMU by 2013, but GSsees 2015 as the earliest
possible date for the others.

"We expect the resumed convergence process to have an additional positive effect on asset prices and currencies, but we do not think appreciation pressures will make the authorities revalue their pegs once in the ERM II."

"The speed with which CEE countries with floating rates return to the path of euro eligibility will be determined by fiscal consolidation, which, in turn, will depend on the strength of the global recovery, the availability of capital and domestic politics," GS added.

It sees the following scenarios possibly taking shape:

* Global recovery and demand for CEE exports will have a strong positive impact on CEE growth, which should then boost fiscal revenue.
* The availability of liquidity, which will also depend on the growth outlook, will determine the availability and cost of financing for the public and private sector.
* However, favourable growth and liquidity conditions may tempt politicians to postpone fiscal tightening. Given that in 2010 alone parliamentary or presidential elections will take place in the Czech Republic, Hungary, Latvia and Poland, policymakers may decide to grow out of debt and deficit, rather than embark on a politically risky fiscal consolidation.

GS analysts see a "strong chance" for Estonia of adopting the single European currency in 2011, with Bulgaria possibly the next in line. However, they presently do not expect Poland or the Czech Republic to join the euro zone before 2015, with Hungary likely a year behind.

Hungary's Prime Minister, Gordon Bajnai, told German daily Die Zeit in an interview last week that the country would be able to become part of the euro zone sooner than Poland or the Czech Republic, for instance. He noted that by 2010 Hungary’s budget deficit will be the fifth-smallest within the entire European bloc.

"We believe that capital flows into the CEE region are likely to resume as Europe emerges from the crisis, and expect the CE-3 currencies to return to a path of steady appreciation over the medium term, with the prospect of euro zone entry reducing risk premia."

No euro for Hungary before 2015-16

Before the crisis hit last autumn, Hungary met none of key Maastricht criteria. Fiscal policy was lax and it was the only country among the currency floaters club to overshoot its inflation target consistently, Goldman Sachs noted.

"The crisis and the subsequent IMF programme may bring it closer to the Maastricht limits, provided that public debt is reined in and the deficit is reduced even further. This does not look very likely, though, as Fidesz (the likely winner of the 2010 parliamentary and municipal elections) is not keen on implementing a strong fiscal program (its leaders have already mentioned plans to renegotiate the terms of the IMF deal)," it added.

With no further fiscal consolidation in 2010, GS analysts do not think EMU entry is feasible until 2015-16 at the earliest, "since lowering public debt from the peak of around 84% of GDP expected in 2011 to the 60% threshold will take years."

However, the GS economists believe "ERM II entry may be discussed for 2011."

Hungary’s base rate to bottom out at 5.50%

Central banks in Hungary, Poland and Israel will hold policy meetings next week, with GS expecting Hungary’s NBH to cut by 50 basis points to 6.00% on 21 Dec. Goldman’s economists, however, expect no change in either Poland (3.50%) or Israel (1.00%). We will also see the minutes from the Czech National Bank’s (CNB) surprise rate cut, which "should shed light on the CNB’s decision: it came as a surprise, given that nothing that would trigger a cut had apparently changed since the previous meeting."

Although Hungary’s inflation surprised on the upside in November, the view of GS analysts for H2 2010 has not changed materially. They, together with the NBH staff, forecast CPI to drop below the 3% target by then.

"Given that Hungary is lagging the European recovery, there is still room to lower rates further. However, the recent financial market volatility has weighed on the forint and, as the easing cycle draws to a close, we think the NBH will want to tone down market expectations of further cuts."

Given that the previous meeting saw two members pushing for an aggressive 75-bp move, Goldman Sachs’s analysts think the Monetary Council will still opt for a 50-bp cut next Monday - but they expect the last 50-bp of cuts to come in two 25-bp clips.

The rate view of GS chimes together with the consensus estimate of analysts in a Portfolio.hu poll released earlier this week. Analysts in a Reuters poll published on Thursday also project a 50-bp monetary easing for next Monday."

Source: Portfolio Online Financial Journal