Hungary Euro Adoption Further In The Distance

  • 26 Mar 2010 2:00 AM
Hungary Euro Adoption Further In The Distance
"The market has raised its deficit forecast for 2010 for the sixth month in a row, a Reuters poll conducted between March 22 and 25 and published on Thursday showed. According to the consensus forecast of analysts, the central bank (NBH) will continue its rate cut cycle next Monday, with only three of the 27 respondents projecting unchanged rates.

Another key change in the series of the news agency’s monthly surveys is that for the first time since September 2009, the consensus forecast for Hungary’s euro zone accession has come to 2015 against 2014 in every poll for the past five months.

Budget outlook worsens further

The analysts’ outlook on Hungary’s budget has become worse than before, with the median of estimates coming to 4.8% of GDP with regard to the 2010 shortfall. This means the market has grown more sceptic about the achievability of this year’s deficit target of 3.8% of GDP. The estimates ranged between 3.8% and 6.5%.

A similar trend is formulating with regard to the 2011 outlook. The consensus forecast here went up to 4.0% from 3.6% a month ago.

The remarks made by chief Fidesz officials probably have a lot to do with this phenomenon. György Matolcsy, one of the top economic advisors to the opposition party widely tipped to win elections next month said the deficit would be manageable in a range between 4.5% and 6.5% of GDP.

Meanwhile, Finance Minister Péter Oszkó said several times the incoming cabinet might be able to revise the deficit target upward if it is willing to carry out sweeping reforms.

And let’s not forget about the European Commission’s assessment published yesterday, in which it said: "Hungary is invited to correct the excessive deficit, to improve the quality of public finances and moderate expenditures through a further reform of public administration and structural reforms addressing loss-making enterprises."

"Strict expenditure control, cautious use of contingency buffers, and readiness to take further action if necessary are required to meet the fiscal targets," said IMF First Deputy Managing Director and Acting Chair also on Wednesday.

If Hungary intends to put government debt firmly on a declining path, "additional structural measures will be needed," he noted.

"Restructuring the public transport system must be tackled forcefully to reduce its drain on the budget," Lipsky stressed.

Meanwhile, the market’s growth forecast has not changed in merit. The consensus forecast remained stagnation for this year and dropped slightly to 2.6% from 2.7% for 2011.

Euro adoption a year later

The consensus forecast of economists showed Hungary will be able to adopt the single European currency in 2015, against 2014 projected over the past five months. Entry to the ERM-2, the anteroom for euro zone accession, is put to 2012, six month later than it was expected in the February survey.

Why the bigger distance from the euro?

The market may see Hungary’s chances for euro adoption waning for several reasons:

- Firstly, the unfavourable change may be attributed to the worse budget outlook. It has become ever more uncertain whether Hungary will be able to cut its deficit to below the Maastricht criterion (3.0% of GDP) by 2011 or 2012. Matolcsy said it would not be tragic if the gap remained wider than 3.0% even in 2012.

- Secondly, remarks made by Fidesz, which is likely to take power in April, apparently also played a part. Senior officials of the party have made rather cautious statements over the past weeks about Hungary’s euro hopes. They have already refrained from heralding a target date imminently. Matolcsy said such date could be set by 2013 at the latest.

- Hungary’s EMU accession was put to around 2015-2016 a number of times. Former Finance Minister Zsigmond Járai suggested the later date, citing the need for a "strong and stable economy" first, while Matolcsy cited external factors, saying the Greek crisis raised concerns about the future of the whole euro zone.

Inflation forecast on the rise too

The consensus forecast for Hungary’s Dec 2010 yr/ry inflation has ticked higher for the third month in a row, coming in at 3.3%, up from 3.2% a month ago.

Base rate to be cut to 5.50%

The central bank (NBH) is expected to cut rates by a further 25 basis points next Monday since the forint is strong ahead of parliamentary elections next month, the Reuters poll showed.

24 out of 27 analysts projected a quarter percentage point cut to 5.50% and three analysts expect rates to stay on hold. The analysts and dealers said a bigger cut was unlikely.

The bank (NBH) has cut its base rate by a total of 375 bps since July to a record low of 5.75%, slowing the monthly pace of cuts to 25 bps in the past three months from 50 bps moves earlier.

The most likely outcome of the 29 March policy meeting is a 25-bp monetary easing, the poll showed.

Hungarian government bond yields fell to multi-year lows this month as local markets are awash in liquidity, primary supply is low and yield hunger in the world buoys assets in the European Union's emerging markets, Reuters pointed out.

There are other factors supporting a 25-bp cut:

The HUF traded around 264 to the euro this week, firmer by more than 2% since the NBH's last rate cut in February. Several rate setters in the region have warned that a strengthening of currencies could dent economic recovery.

Inflation prospects also support a rate cut as low demand in the economy curbs price pressures, the analysts said.

"Once the tax hikes of last year fall out (from the base), inflation will fall very sharply and there will be no CPI pressures," said Neil Shearing of Capital Economics in London.

The NBH warned in the minutes of its February meeting that it may finish its rate cuts any time, but the median forecast for the year-end base rate fell in the monthly poll to 5.25% from 5.50%, indicating at least one more cut after March.

50-bp cut very unlikely

Hungarian assets are now supported by one of the lowest budget deficits in the European Union (EU) and a foreign trade surplus.

But most rate setters are likely to deem a 50 basis point rate cut too brave in light of Greece's debt problems which continue to pose risks on the region's markets.

"It's still unclear how the Greek story will unfold and there are question marks over other EU states like Portugal," said Dávid Németh, ING Bank's analyst in Budapest.

"The global rally of equities may have gone too far and we will see only in May or June what the next (Hungarian) government will do with the budget."

Market impact: A 50 basis point rate cut would initially weaken the forint and could ignite a rally in the bond market.

"Accelerating the cuts again would be inconsistent and could trigger speculation for deep reductions," one bond trader told Reuters.

According to the consensus, a hold decision has a low probability.

UBS analyst György Kovács said in a note that the NBH was likely to keep rates on hold because central banks tend to avoid changing policy rates ahead of elections in order to distance themselves from political debates.

A decision to keep rates on hold could strengthen the forint and trigger a rise in bond yields.

The outcome of’s own rate poll was the same for next Monday, but it showed a turning point regarding the end-2010 base rate estimate, which came to 5.13%."

Source: Portfolio Online Finacial Journal

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