Hungary’s sale of a eurobond last week was a sign of growing investor confidence in the government’s policies, but it was an expensive debt issue and the country must focus on cutting its debt, Iryna Ivaschenko, the International Monetary Fund’s (IMF) representative in Hungary, told Reuters on Thursday.
The IMF, European Union and World Bank approved a EUR 20bn loan arrangement for Hungary last autumn. The IMF is due to hold its next, third review of Hungary’s performance at the end of August, early September.
“The success of the eurobond issuance clearly shows that markets appreciate the efforts that have been made by Hungary in terms of addressing its key vulnerability — the budgetary situation,” Ivaschenko said in an interview.
“Given that the debt is high, and the interest that Hungary is paying on the accumulated debt is still high, this (eurobond) needs to be taken as a good sign, but the main effort should be on reducing debt, not simply financing it,” she added.
“In terms of the 2010 budget, there is no doubt … that it is a challenge,” Ivaschenko said, adding that Hungary should adopt a credible budget with credible measures for next year.
Ivaschenko said Hungary’s government showed it was committed to meeting the deficit targets agreed for this year and next. But as the government expects the 2009 deficit to overshoot the full-year target of 3.9 percent by the end of September, the IMF will look at steps the government will take to bring the budget back on track by the end of the year, she said.
When asked if the IMF’s previous forecast for a 6.7pc contraction in the economy this year was realistic, Ivaschenko said: “It can be worse, not significantly but somewhat. Consumption has been weaker and also the euro area growth, especially Germany … the outlook is still rather pessimistic.”
Ivaschenko said although the Hungarian banking system faced challenges due to an increase in non-performing loans and a poor growth outlook, the rollover of debts between parent banks and subsidiaries has been much better than expected.
“Under a baseline scenario, barring any significant negative shocks, the situation (of the banking system) is challenging but manageable,” she said.