WRAPUP 1-Hungary cbank sees fiscal risks, govt sticks to taxes

Published 11/11/2010, 12:29 PM
Updated 11/11/2010, 12:32 PM

* 2011 budget goal achievable due to one-off items-cbank

* Reforms, spending cuts missing, sustainability at risk

* PM Orban sees new long-term special taxes beyond 2012

* Forint, bonds weaken as euro zone woes add to local risks

(Combines stories, adds analyst, markets)

By Krisztina Than and Gergely Szakacs

BUDAPEST, Nov 11 (Reuters) - Hungary's central bank warned on Thursday that the government's 2011 budget could pose long-term risks as it contains no plans to cut spending or reform central Europe's most heavily indebted economy.

The central bank's warning came after similar criticisms of the centre-right government's economic plans from the International Monetary Fund and Hungary's independent budget council. Financial analysts have also expressed misgivings.

The Fidesz government has rejected austerity plans and wants to plug its budget deficit with windfall taxes on certain sectors and transfers from private pension funds.

It also hopes income tax cuts will boost growth to 5 percent by 2013 and help reduce the country's debt from next year.

Markets have so far received Fidesz' commitment to cut the budget deficit to below 3 percent of GDP next year positively, but long-term risks and extra taxes on banks, telecoms, retail and energy firms have spooked investors.

These concerns strengthened in the wake of an unexpected announcement from the government on Wednesday that it planned to keep an extra tax on banks and companies in place beyond the end of 2012, when these taxes were slated to expire.

This plan erodes predictability and investor sentiment, analysts said.

Following an almost 5 percent plunge in Budapest stocks on Wednesday, the forint fell 0.8 percent to 276.45 versus the euro on Thursday and bond yields rose 10-15 basis points as euro zone debt concerns added to local risks.

The central bank -- repeatedly attacked by the government in the past for not cutting rates fast enough -- said the 2010 and 2011 budget targets were achievable but risks mounted down the line due to the bad structure of the budget which lacked spending cuts and reforms.

"The budget submitted does not contain deep structural reforms, it preserves an inefficient spending structure and high budget redistribution," central bank Governor Andras Simor told a news conference.

"The planned measures worsen long-term fiscal sustainability, and despite the significant personal income tax cut, the long-term growth prospects do not improve substantially, and the planned measures increase inflation risks," he added.

Simor said Hungary's 2011 budget bill effectively contains fiscal stimulus worth 2 percent of GDP, which will be financed by an expected transfer of pension savings to the state.

The bank said the government's measures would boost inflation in 2011 and the bank remained committed to meeting its 3 percent inflation goal "with every tool available."

RECORD LOW

The bank has kept its main lending rate at a record low of 5.25 percent for the past six months and will next meet on Nov. 29 when it will issue its fresh inflation and growth forecasts in a quarterly inflation report.

Simor said the bank would decide on rates on the basis of its projections -- adding that while the 2011 budget poses inflation risks, its report would assume stronger exchange rates and lower oil prices than a previous report in August.

Wage trends have been more benign than expected, he added.

"We think the MPC will continue the wait-and-see approach this year, while now we see a bigger chance for a 25bp rate hike in Q1 next year, although until domestic demand remains poor and the employment rate doesn't start to increase substantially the NBH is not in a hurry to hike," said David Nemeth at ING.

"It is quite unlikely that we will see an evident figure for that (rise in employment) before the beginning of next year."

The centre-right government seems determined to use extra company taxes to offset income tax cuts and big tax breaks for families also beyond 2012.

Prime Minister Viktor Orban said on Thursday that Hungary must create a new long-term system of taxes for banks and companies in 2012 to replace the crisis taxes that were necessary to solve short-term fiscal problems.

The government on Wednesday confirmed that it plans to keep its recently introduced windfall taxes on certain sectors of the economy in place to a reduced extent until 2014.

Orban said Hungary would negotiate in 2012 with banks, retail, telecom and energy firms about the new taxes, but would not return to the status quo seen before the crisis.

Some analysts said that in the current negative sentiment due to Irish and Portuguese debt woes, Hungary's long-term fiscal sustainability risks could come more in the spotlight.

"The HUF is responding to the double whammy of internal shock from policy announcements yesterday causing significant equity selling on one hand -- and a rapid catch up on periphery stress too," said Peter Attard Montalto at Nomura.

"All going to prove that Hungary's recent market stability has rested on very thin ice indeed."

(Reporting by Krisztina Than and Gergely Szakacs; Editing by Giles Elgood)

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