Amid widespread criticism from market analysts, Hungary’s prime minister Ferenc Gyurcsany has renewed his pledge to undertake deep structural reforms to complement a package of deficit-slashing measures announced earlier this month. Gyurcsany told Emerging Markets in an exclusive interview that a more comprehensive programme of expenditure cuts and fiscal restructuring is set to be unveiled this month.
“The real challenge is on the expenditure side,” Gyurcsany said. “The main character of the reforms is to reshape private and public responsibilities. The most important measures, in healthcare, education and pensions will be announced in the coming weeks, together with specific measures in restructuring public transport.”
Increased revenue from tax hikes is a necessary but not sufficient condition for the government to meet its goal of trimming its budget deficit, he added.
His comments came as Hungary's forint hit a record low against the euro Monday following a decision by the central bank (NBH) to raise rates by 25 basis points to 6.25% after eight months of no rate moves. Hungary's central bank said the rise was due to “recent macroeconomic tendencies and to inflation.” The bank said Hungary was lagging in the international battle for foreign capital due to rising interest rates worldwide
Gyurcany’s fresh fiscal pledge also sought to see off much of the recent market disapproval: international credit rating agency Standard & Poor’s downgraded Hungary’s credit ratings last Thursday.
“The downgrade reflects the continued deterioration of Hungary’s public finances, as evidenced by very high general government deficits and quickly rising government debt figures,” Standard & Poor’s credit analyst Kai Stukenbrock said in a statement.
On June 10 Gyurcsany announced an austerity package aimed at halting this year's deficit at 8% of GDP, and reducing it to 3% by 2008. Analysts were relieved that the socialist-liberal coalition, re-elected in April, had at last begun to address the runaway budget.
But the package disappointed the markets: more than 60% of the planned savings will come from higher taxes. Moreover, the plan lacks detail in areas where spending cuts are planned.
“They’re starting to come clean on accounting – that’s a huge relief,” said Juliet Samson, an analyst at HSBC. “But the question remains what other structural and budget restructuring is in store,” she added, pointing out that fiscal consolidation based on raising taxes was less likely to succeed than consolidation based on spending cuts.
Hungary has also been one of the hardest hit by recent turbulence in global markets, partly because of the international backdrop and partly because of domestic factors. It has a spiralling budget deficit - on track to overshoot 9.5% of GDP and a high current account deficit - about 9% of GDP.
The government faces the challenge of having to rebuild confidence with markets and the public alike. “It turned out that we really need a very deep turnaround programme – radical change in macro and social policy. We started real moderate change in social policy over the last 18 months, but we needed pro-reform public sentiments. A more radical reform has to be embedded in the right public atmosphere,” Gyurcsany said.
But the prime minister remained defiant in the wake of growing scepticism that Hungary can achieve a deficit target of 3% - 3.5% GDP in 2008. “The target is very clear,” he said. “In the short term there needs to be adjustment and in the long term, reform – these are the two pillars by which I will lead this government.”
Gyurcsany told Emering Markets that he remains committed to Hungary’s joining the euro “in the second half of 2010, or early 2011 – very soon after the next election."
"I will argue for the adoption of the euro but the whole nation needs to answer the question,” he said, referring to a possible referendum on the issue.