Hungary's economy could sink into stagnation and credit supply may fall significantly, the economy minister said on Thursday, adding that a "safety net" type of agreement with international lenders could shield Hungary from the turmoil in the eurozone.
Hungary broke ties with the International Monetary Fund last year and went more than a year without a financing backstop as the government used unorthodox means such as crisis taxes on banks and other sectors to shore up the budget and spur growth. Budapest asked the Fund and the European Union for help last week after the forint currency fell to record lows against the euro in the wake of a warning by Standard & Poor's that Hungary could lose its investment-grade credit rating. Its request helped stem the forint's plunge but markets remain shaky due to the eurozone debt crisis and the threat of a ratings cut to "junk" remains a possibility, which could push already high borrowing costs up even further.
Economy Minister Gyorgy Matolcsy said there was a risk that economic growth could halt after an expansion of 1.4 percent year-on-year in the third quarter due to a good season in agriculture and industrial exports. "We could see another wave of corporate defaults, the economy could fall into stagnation and credit supply could fall significantly," Matolcsy wrote in a column in the weekly Heti Valasz, adding that Hungary needed a new plan for growth. The government is due to revise its 2012 growth forecast in the coming weeks. The 2012 budget was based on 1.5 percent GDP growth next year, which analysts and the European Union said was too optimistic.
A more pronounced slowdown could force Hungary into more belt-tightening next year on top of a 1 trillion forint improvement pencilled into the 2012 budget with the help of tax hikes, including Europe's highest VAT rate, and spending cuts. But with Europe heading into a slowdown and banks in Hungary squeezed by a sectoral levy and a foreign currency mortgage relief scheme that will inflict billions of forints of losses, one analyst said the government may be running out of options.
"The government can only create a better situation if it does an about-face in its banking sector policy. At the moment it's not visible that we could shift to an economic growth course," said analyst Zoltan Torok at Raiffeisen, who projects a 2 percent contraction next year.
Hungary is the most exposed economy in central Europe to the debt crisis in the eurozone due to its high external debt, the reliance of its banks on external funding and a track record of ad hoc policies, which have undermined investors' confidence. The government debt agency AKK sold all 30 billion forints worth of 12-month bills on offer at a tender on Thursday but investors demanded over 7.07 percent yield for the paper, the highest since September 2009.
Forward rate agreements are pricing in 50 basis points worth of increases in official interest rates over the next month from the current 6 percent. The National Bank of Hungary will hold its monthly policy meeting next Tuesday. The bank warned on November 15 it may need to gradually tighten monetary conditions if the increase in risk aversion affecting European financial markets persists.
Matolcsy said the "safety net" agreement Hungary aims to seal with international lenders could shield the economy from the turmoil in Europe. Talks on what Budapest hopes will be a precautionary agreement with as little conditionality as possible will begin next month and are expected to end by February. Analysts have said the talks could be difficult if the government wants to stick with its unorthodox ways to fix the economy, but with news of the planned deal made public, it could not afford to walk away without an agreement.