Not all plain sailing?

Hungary has recently found itself in a sweet spot, with inflation falling and bond yields low. But this is too good to last, economists warn, Emerging Markets reports.

April was a good month for Viktor Orban, the Hungarian prime minister, and his centre-right Fidesz administration. Certainly for a government three years into its four-year term, and facing a recession – the economy contracted by 1.7% last year – things seemed on the up.

Emerging Markets said, as a glance at the government website reveals, Orban was busy with ceremonial duties – cutting ribbons at the expansion of a rolling stock manufacturer (Swiss-based Stadler – a 13.6 million euros investment) and laying the cornerstone for the 200 million euros ($264 million) extension to Lego’s plastic plant at Nyiregyhaza, in the job-starved north-east.

Meanwhile, the markets largely welcomed the Funding for Growth programme announced by Gyorgy Matolcsy, the newly appointed central bank governor – albeit more because it involved modest amounts (500 billion forints, or about 1.7 billion euros) that would not put the forint’s exchange rate in danger and which would be designed to stimulate the small-business sector.

More fundamentally, a clutch of positive macroeconomic data surfaced: inflation in March came out at just 2.2%, and on April 23 the central bank cut the base rate to 4.75% – both figures at levels not seen since the 1970s.

Emerging Markets underlined, better still, the general government deficit for 2012 – as measured by Eurostat – came in at a mere 1.9% of GDP, while bond yields and CDS spreads were at all-time lows. “Several economic indicators have signalled that Hungary is becoming more and more robust and confidence in the country is increasing,” the government’s media office stated on April 18.

It also emphasized that the deficit result meant that Hungary should be removed from the European Commission’s Excessive Deficit Procedure (EDP), under which governments who spend more than 3% of GDP risk incurring restrictions on EU structural funding – something the Orban government is desperate to avoid.“Hungary’s fiscal deficit-to-GDP ratio was seventh-best within the EU, equal to that of Finland, and far better than the EU average,” the government boasted. “Last year, in the EU as a whole, 17 member states had government deficits that breached the 3% statutory limit… this data substantiates expectations that on the basis of statistics, Hungary must exit the [EDP].”

Source: Emerging Markets