Hungary: Another fiscal package to come in months

• Central bank’s possible new policies closely watched, further rate cuts to come

• Cabinet may need to deliver further austerity measures in coming months

• Successful Eurobond issues help refinancing, no IMF agreement in sight

• Forint may stay weak, due to further rate cuts, new central bank policy

• Further strong decline of bond yields from current levels unlikely

After the recession of 2012, it is a question whether the Hungarian economy can avoid another decline this year. We still think that it is more likely that it will not - our forecast is at -0.2% for real GDP for this year. However, as for q/q developments, we may see some muted positive numbers after the declines in each and every quarter of last year. The general picture should remain the same as in the previous years. Domestic demand should continue to drop, which is partly counterbalanced by the positive contribution of net exports. Domestic demand should only contribute positively as of 2014, when the role of net exports may fade, due to the higher import needs of local demand. This means that the current account balance and net financing position should continue to be positive, but this is necessary to cut the external debt further.

On the fiscal front, the cabinet may again face a difficult situation, similarly to 2012, when there were numerous adjustment packages. We perceive slippages in this year’s budget, due to poor growth and execution risks tied to measures already announced, and thus a fiscal adjustment package is unlikely to be avoided in the coming months. The new forecasts of the European Commission, disclosed February 22, are even grimmer than ours, which suggests that the adjustment may be larger than 0.3-0.5% of GDP assumed by us earlier. However, as the parliamentary election of 2014 is approaching, the cabinet is less likely to increase the burden of households. Therefore, further taxes on the corporate sector cannot be ruled out. This, on the other hand, increases the risk that growth will remain subdued, and that public debt cannot decline too strongly, despite the deficit being under 3% of GDP.

As for the currency, the EURHUF rate is expected to remain close to 300 or even increase slightly above this level in the coming months. This is because rate cuts may continue and the new leadership of the central bank may pursue an unconventional policy to boost growth. However, the approach of the elections may keep the cabinet cautious, as a too substantial weakening of the forint is harmful for the household sector. As for the bond market, it may remain calm in the coming months. Yields may slightly increase towards the year-end, as we do not expect any further improvement of the sentiment stemming from government policy, while Euro Area yields may slightly increase towards the year-end.