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Tuesday, February 12, 2008

Turning The Screw

Well it never rains but it pours as they say. Hungary's situation is dire, and deteriorating by the day, and what do the EU Commission do? Warn Hungary that even more budget cuts may be needed.

``From 2009, the budgetary outcomes could be worse than expected,'' EU finance ministers said in a report endorsed today at a meeting in Brussels. ``Lower-than-projected GDP growth could lead to a higher deficit.''

Government by report. The thing is I am absolutely sure that on the substantial point the finance ministers are right, that Hungary's budget situation can deteriorate substantially in the mid to longer term, but is now actually the moment to be turning the screw like this, when each day is bringing yet another piece of bad news.

Yet of course the EU ministers may not be in possesion of the full facts here (or perspectives) since they may still be looking at those rosy forecasts of expansion to accelerate to 2.8 percent this year and 4 percent in 2009 which the Hungarian government keeps sending them (this is why I am so critical of research institutes like GKI, since by offering pie-in-the-sky forecasts you alert noone to the full reality of the situation). My own guess is that 1% growth would be a good result for whole year 2008, and after that we will see the extent of the damage before we start thinking about 2009, although lets wait and see what is in Q4 2007 GDP this week, before we start wandering too far forward. In this sense again the EU are right to warn that it is very risky to prepare budget forecasts on unduly optimistic scenarios.

But what gets me is their lack of ability to respond to situations as they happen. Hungary needs some sort of plan, some sort of support, and indeed the whole EU10 situation needs thinking about, and out loud. Isn't that what transparency is meant to mean? At the moment, as I said earlier in the week, Hungary is simply in a now way out policy double bind, trapped on both the fiscal and the momentary front, while in the meantime internal demand wilts on the vine. And all the EU finance ministers can tell us is that Hungary may need new spending cuts to meet its deficit target if economic growth falls short of government forecasts. Pah!

Meantime news on almost every other front is unremittingly bad.

Portfolio Hungary informed us yesterday that Hungary's equity funds were badly hit by massive capital withdrawals in January, with with withdrawals from one individual large index-driven fund hitting 20 billion HUF. Net sales were overall positive across the equity sector but investors increasingly placed their money in low-risk money market and guaranteed funds, not only new funds, but also capital retrieved from bond and balanced fund redemptions.

At the same time the political instability is growing, as the jitter level mounts, with Albert Takacs departing the Ministry of Justice and Law Enforcement today, to be replaced by former Finance Minister Tibor Draskovics, according to the Hungarian daily Népszabadság. Now I am not a political commentator, so I really don't know how to interpret what is happening here, but then I have to say that with all the strain that is being put on the system, these kind of "events" are really par for the course, and that it was only last week that the press was full of speculation that the Prime Minister himself might resign.

And to cap it all, Portfolio Hungary this afternoon published the results of their latest analysts poll:

Extremely feeble economic growth and higher-than-expected inflation will be characteristic of Hungary in 2008, Portfolio.hu's poll of analysts showed on Tuesday, indicating a gloomy market ahead of key data due out on Thursday. The consensus forecast shows that Hungary's GDP growth remained around its lowest level in a decade in the fourth quarter of 2007 and while inflation is coming down gradually, it will still be above the central bank's medium-term target by end-2009.

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