Published: January 17, 2013
Experts call for policy rethink, but acknowledge economy’s fundamental strength.
Hungary is in a strong enough position to see out 2013 without having to worry about its financial security, experts suggest. But it could yet be held back without a change in policy direction away from controlling the budget deficit and towards encouraging growth.
Peter Oszko, CEO and president of Portfolion Venture Capital and Fund Management and a former finance minister for the country, said: “How come a country with government debt of below 80% of GDP and a budget deficit that is comfortably below 3% has the problem of whether or not to turn to the IMF? The basic issue, as is shown in the downgrading of the credit rating, is that there is a huge credibility issue with the economic policy of the government.”
Speaking at a panel discussion during Euromoney’s Central and Eastern Europe Forum in Vienna, Oskzo continued:
“The government is willing to pay higher interest quotes on a lower level of debt in order to avoid difficult negotiations with the IMF, and the market still has an appetite for this type of government bond. Financing of the country will be solved, but at a higher cost which will come from the budget. The government would rather pay that cost instead of fortifying the direction of the economy. ”
Economy Minister Gyorgy Matolcsi has been following what he describes as "unorthodox economic policy". This, in Oszko’s view, is damaging the country’s growth potential and also reducing the potency of the government’s budget deficit reduction plans.
“If you look at flat tax, for instance, which was introduced in 2011, the cost of that is around 2% of GDP,” Oszko explained. “That needs to be financed by other resources. If you calculate all supplementary taxes on the banking sector, telecoms sector, energy companies... It comes to less than that. So what the government does is use the resources normally used for investment and employment for other types of payment on the basis of political logic. This [spending] is not reflected in growth, consumption or investment.”
Over the short-term, however, Hungary can get by with or without a policy rethink. This would be the case even if, or rather when, lending becomes more expensive.
Gergely Tardos, chief economist of OTC Bank, told EMEA Finance: “The ECB and the Fed signalled that they will start to phase out liquidity supporting measures towards the end of this year. Excess liquidity will gradually fade out from the system. Interest rates of all the key currencies could remain very low until the end of the crisis; right now the Fed believes that it will keep rates around 0% until 2015.
“After that, when things hopefully improve, it usually puts pressure on emerging countries that did not do their homework. If Hungary changes its policy, I think there will be no large questions. But even in the current set-up, over the last four quarters Hungary has paid €8bn of external debt – 8% of GDP. Even with very low growth potential, Hungary can be in the position where the rising interest rates in the global market will not hurt.”