Hungary to struggle without IMF

Hungary hopes to emulate the few countries that have spurned IMF aid and emerge from crisis on their own, but it is much more likely to follow the example of other crisis-hit EU states and be forced back to austerity.

It is no Malaysia or Turkey, the first of which rejected the International Monetary Fund's demand it open its economy in the 1990s Asia crisis and the latter weaned itself off IMF backup in 2008 after enacting its own Fund-like fiscal plan.

It more resembles Latvia or Greece, whose high public debt, large deficits and dependence on foreign financing eventually overruled their opposition to the Fund's usual diet of belt tightening and other reforms.

Budapest's debt, at 80 percent of annual output, is much lower than Athens' or Riga's and just above the European Union average, but it must roll over a fifth of its borrowing next year amid lingering doubts over the bloc's weakest members.

That is the main sticking point in Prime Minister Viktor Orban's decision last month to declare talks with the IMF over and pursue a pro-growth, anti-austerity strategy.

What is more likely, economists said, is his tax cuts for small businesses and a pledge to end four years of belt tightening will result in higher deficits that will drive up borrowing costs and hit the forint before he is forced to revert to the more traditional cost-cutting route.

“You're trying this pro-growth strategy, it doesn't really boost your revenue, and eventually the money runs out,” said Daniel Hewitt, an economist at Barclay's Capital.

 Markets have held off punishing the central European country of 10 million, believing Orban and his centre-right Fidesz party are posturing ahead of Oct. 3 local elections and will eventually clinch a deal once their campaign concludes.

But so far his rhetoric echoes that of other leaders who have rejected IMF help, portraying the IMF as an interloper from whom Budapest must wrest back its economic autonomy.

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That was the strategy of Turkish Prime Minister Tayyip Erdogan, who walked away from a new IMF deal last year.

The difference is Turkey has a track record of its own austerity and now plans to cut its deficit to 1 percent of gross domestic product in 10 years, from 5.5 percent in 2009. Its debt of 45.5 percent of GDP is much lower than Hungary's.

Malaysia also famously rejected IMF advice and cash in 1997, closing its markets, repegging its exchange rate, introducing capital controls and raising state spending to fuel the economy.

It emerged with strong growth. But it, too, differs from Hungary, with a state oil firm that makes up for half of budget revenues, a low level of public debt, strong currency reserves and a string of pre-crisis budget surpluses.

Main dangers faced by Malaysia and Turkey were linked to their balance of payments, not the threat of a public finance crisis faced by Hungary and other European stragglers.

In every one of those countries — EU states Latvia, Romania and Greece and non-members Serbia and Ukraine — governments first looked for options other than the austerity that they eventually embraced after they were slowly shut out of debt markets and had no other way to finance their budget deficits.

Hungary could potentially retain investor trust as Turkey did last year by sticking close to tight budget targets, and economists say it does have a chance of meeting its 3.8 percent of GDP deficit goal this year, even if it may be a close shave.

The question is whether or how much Fidesz may loosen policy next year in the search for stronger growth rather than aiming for the 3 percent target agreed with the EU. That may become clearer in a 2011 budget due around October.

“They'd probably have to go along with the tenets of the IMF deal, which would be to keep the deficit below 4 percent,” said Tim Ash, head of CEEMEA research at the RBS. “But it does not seem that's what they want to do. They want a pro-growth tack.”

Crunch Coming

Hungary has not tapped any of its bailout aid funds since last year and has also benefitted from improved global risk appetite to draw solid demand at recent debt auctions.

It already has 3.9 billion euros ($5.15 billion) in government coffers, including 1.4 billion from the aid deal earmarked for financing this year. There is another 1.0 billion euros on loan to banks, 0.5 billion of which is available next year.

According to Reuters Creditviews and the Hungarian debt agency, it needs to roll over bonds and treasury bills worth about $8.44 billion by the end of October, including a 1 billion euro ($1.32 billion) euro bond. That total climbs to $9.7 billion by the end of this year and to around $17.2 billion over the next 12 months.

The country must also start repaying its loan to the EU in the fourth quarter of next year, with a repayment of 2 billion euros, while the repayment of the IMF loan starts in 2012.

If it needs a new backstop, the European Union will refuse to negotiate a deal without the IMF, analysts said, because it must also keep up pressure on other fiscal laggards.

And Brussels may put pressure on Budapest ahead of Hungary's EU presidency next year for non-compliance on issues ranging from competition to interference with central bank independence.

Orban is counting on a bank tax law his government hopes will earn 187 billion forints this year and the same in 2011.

But either way it should eventually have to return to international markets, an unforgiving arena that will likely drive up borrowing costs and undermine Orban's strategy, in turn forcing Budapest back to cost cuts.

“I don't think the math stands up,” said Neil Shearing, an economist at London-based Capital Economics. “It's just a matter of how much collateral damage is done in the meantime.”

(c) Copyright Thomson Reuters 2010

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