Hungary faces slowdown, risk of funding gap: IMF

Hungary's debt remains broadly sustainable even if the economy stagnates this year, but an external funding gap could emerge if the eurozone crisis drags the country into recession, the International Monetary Fund said on Wednesday. Hungary is seeking a precautionary financing deal from the IMF and the European Union to shield its currency and bond markets as it prepares to roll over nearly 5 billion euros worth of external debt on top of forint expiries this year.
The IMF forecast a 2012 baseline scenario of 0.3 percent growth in Hungary, a day after the EBRD development bank projected a 1.5 percent contraction and EU finance ministers warned they could suspend development funds if Budapest failed to cut its budget deficit in a sustainable manner.
For a table of the IMF's forecasts, see "While many of the external factors are beyond Hungary's control, a well-crafted policy mix that avoids the ad hoc interventionist measures of the past year and strengthens economic institutions can reduce the likelihood of an adverse scenario where Hungary loses market access," the IMF said in its staff report.
It said a precautionary arrangement could relieve some of the constraints Hungary faces and help rebuild investor confidence, tarnished by a string of ad hoc government policies and measures that have undermined independent institutions. It said a new central bank law, which derailed informal talks on aid last month and which Hungary has since pledged to modify on most contested points, called into question the government's commitment to central bank independence.
The IMF also criticised another law, which etches in stone a flat income tax regime, for imposing significant constraints on future changes to fiscal policy, also calling for the strengthening of a recently reformed fiscal oversight panel. Under the IMF's baseline scenario, the Hungarian economy will stagnate in 2012, and the country's external financing needs will be met at a higher cost and shorter maturity as risk aversion rises and bank deleveraging continues. However, the IMF said if the eurozone crisis escalates, dragging Hungary's economy into a 3.4 percent recession due to a sharp fall in exports, an external financing gap could emerge in 2012-13 as foreign investors reduce bank and sovereign funding.