Despite a weaker forint another NBH's cut still expected

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Despite a weaker forint another NBH’s cut still expected

The negative market sentiment (The missile attack on a Malaysian airliner above the Ukrainian/Russian border and the Israeli ground-move against Hamas) pushed the EUR/HUF above 311. Nevertheless despite of the weakening we expect that NBH may cut base rate by 10bp from 2.3% to 2.2% on Tuesday, which is already priced in the market. In short term the HUF may weaken slightly if international sentiment remains negative, but we don't expect massive volatility. We see important resistance at 312.5 and 315 on the weak side, which might be tested in nervous market environment, but we expect mainly range trading between 303 and 313.

Meanwhile, Minister of National Economy, Mr. Varga announced yesterday that they freeze HUF110bn expenditure till the end of the year. The achievement of 2.9% of GDP budget deficit target can be ensured with these measures.
The ministries have to cut their expenditures by HUF40bn, while HUF70bn savings will be come from the postponement of state investments (jurisdiction, batch etc. investments of around HUF35bn), freezing of general reserves of budget (HUF20bn), lockup HUF15bn of Extra Budgetary State Funds. The measures were required (based on the ministry’s statement) as the lower than planned inflation caused revenue fall of VAT and excise duty income, the expansion of public forced worked program created HUF47bn extra expenditure and some investment projects will be completed through domestic instead of EU funds. We see risk that EU may punish Hungary because of some infrastructure investment, which may cost HUF60-90bn for Hungary. It is still a question that may the state take part from the cost of foreign currency denominated loans conversion to HUF ones.
Mr. Varga emphasized that in case the revenues are coming they may unfreeze the HUF110bn expenditure cut in 4Q14. One very important question is, that how the 2015 budget plan will calculate with this years’ one of expenditure cuts. As the sector taxes have increasing weight in the budget, it is very unlikely that it will be moderated. Based on our calculation the state deficit might be slightly below 2.9% of GDP in 2014, but without a strong EUR/HUF (around 300 levels) it might be still not enough to decrease the public debt in 2014 compared to 2013. Although it is crucial as the European Commission highlighted couple of weeks ago, that excessive deficit procedure will be restarted if Hungary is not able to decrease the public debt in 2014.
Positive domestic news is that the net real wages were increasing by 5% Y/Y in May. It strengthens our view that domestic demand in Hungary may remain relatively strong in the coming months, which might help for the budget as well. On the other hand, the household savings may increase further which can support the financing of Hungarian debt from domestic sources (which is a target of Debt Management Agency).