Hungary will not call down the next installment of its IMF loan, and it is preparing an agreement on postponing the call-down of its next installment of a loan from the European Union, Finance Minister Peter Oszko said at a press conference on Monday, after an IMF-led delegation finished a review related to a EUR 20bn financial support package Hungary signed for in the autumn of 2008 after its bond markets locked up.
The IMF delegation reached a staff-level agreement with Hungarian authorities on a package of policies aimed at completing the fourth review under the stand-by arrangement, the IMF said in a statement. The delegation expects to finalise a letter of intent summarising the agreement, allowing the IMF board to consider the completion of the review in December.
Hungary does not intend to draw down the SDR 725m (EUR 792m) that would be made available upon completion of the fourth review “reflecting the consistent implementation of economic policies and the reduction in global financial strains”, but IMF resources will continue to be available to provide insurance against the impact of any unforeseen deterioration in external financing conditions.
The European Union is satisfied with Hungary’s consolidation of the general government, said Barbara Kaufmann, a representative of the European Commission.
The EU also sees that the call-down of the remaining EUR 1bn from Hungary’s EU loan will not be necessary for the time being. The money will be available for later use, Ms Kaufmann said.
Hungary has already called down more than 14.2bn of the combined EUR 20bn international financial support committed to it last autumn, and it has until October 2010 to call down the remaining EUR 5.7bn, said Finance Ministry state secretary Almos Kovacs. Of the amount left to call down, EUR 3.7bn is from the IMF, EUR 1bn is from the EU and EUR 1bn is from the World Bank.
Based on the budget structure approved for 2010, Hungary’s 3.8pc-of-GDP general government deficit target for next year is realistic, IMF delegation head James Morsink said.
The IMF would not tolerate a 7pc-of-GDP general government deficit mentioned as a possibility next year by main opposition party Fidesz, Mr Morsink said. “We met with Fidesz leaders who said the deficit could rise to 7pc, but as we see it, the 3.8pc general government deficit is achievable in 2010,” he added.
The deficit could rise over 3.8pc in a worst-case scenario, he said, adding that there are indeed risks.
The IMF welcomes steps Hungary is taking to strengthen the country’s financial system and give its financial market watchdog greater power, said Iryna Ivaschenko, who heads the IMF office in Hungary. Hungary’s bank system is stable and its capital adequacy ratio exceeds the legally required amount, she added.
Mr Oszko said Hungary’s economy would contract by 6.7pc in 2009 and 0.6pc in 2010.
The contraction for 2009 is in line with the government target, but the drop in 2010 is more optimistic than the official government projection of 0.9pc.
Average annual inflation will reach 4.2pc in 2009 and 3.9pc in 2010, Mr Oszko said.
The official government projection for CPI are 4.5pc for 2009 and 4.1pc for 2010.
“Since the stand-by arrangement was approved in November 2008, significant progress has been made in strengthening policies that underpin fiscal sustainability and financial stability. Government spending has been reduced in a durable way, while allowing the fiscal deficit to increase in 2009 to avoid exacerbating the economic contraction. In the financial sector, bank supervision and the remedial action framework have been enhanced. By better anchoring market expectations and creating room for a cautious reduction in the policy interest rate, these measures have allowed Hungary to take full advantage of the ongoing stabilization in global financial conditions,” the IMF statement said.
The end-September targets on the central government’s primary balance, central government debt, CPI inflation, and net international reserves, as well as the target related to government lending to banks, were all met, and the target on submission of legislation to parliament on strengthening the institutional framework for bank supervision was met with only a minor delay, the IMF said.
The IMF sees quarter-on-quarter real GDP growth turning positive in the second quarter of 2010 as recovery in the eurozone boosts demand for Hungarian exports.
“Strict expenditure control will be needed to reduce the general government deficit to 3.8pc of GDP in 2010,” the IMF said. Over the medium term, a substantial decline in the fiscal deficit is needed to put government debt as a share of GDP firmly on a declining path.