There has been news this morning from local papers (Magyar Nemzet) that the government will bring forward amendments to the 2013 budget that will exempt the MNB from the financial transactions tax (FTT). The reversal is not a surprise, but happening now is a surprise. The IMF/EU/ECB were always going to make it a precondition of an SBA that the MNB is exempt, but the surprise is that even as recently as the start of last week PM Orban was stressing the importance of the MNB contributing like everyone else to the job creation policy (of which the MNB would have been contributing about half of the HUF250bn cost). Politically making the move now rather than in a larger package of SBA-related amendments looks odd to us too. Pressure may well have come from the ECB and EC to such an extent (given how overt the attempted monetisation of the deficit was by the tax) that the government (which is at its core fiscally conservative if unorthodox) decided to just get it out of the way now.
However, what is interesting is that the hole left by exempting the MNB will be filled by expenditure side cuts. We think this means it could be viewed as unfunded – with a budget overrun anyway, where is an additional HUF120bn odd of expenditure cuts going to come from, when the IMF will be forcing additional expenditure cuts on lower growth assumptions alone and then more is likely to be required for the various parts of the SBA about cleaning up expenditure and making structural reforms. There have already been at least two rounds of “HUF40bn” line ministry expenditure cuts made for 2012 and more have been factored into 2013. The civil service is already slimming down and leaking staff, and morale is low. We really struggle to see where there is any additional fat that can be cut without starting to hack, more structurally, at the state. The likely outcome may be some of the nibbling away at the (already non-existent in our view) budget reserves, and we still think increasing the FTT on interbank transfers may be an easy way out too. We will await the detailed amendments from the government next week to see exactly how we might need to alter our forecasts for the deficit (currently at 3.0% of GDP for next year vs the government’s target of 2.2% of GDP), but risks would seem to be to a larger deficit given the importance of the jobs plan going ahead.
For markets (structurally around the FTT) we think the impact of this is minimal because the MNB was going to absorb the tax. The key distortions to BUBOR and the bond market from the FTT on banks themselves will still be there, in our view. We think the potential issues on distortions to the monetary transition mechanisms or to the need for offsetting 2.5pp rate hikes can be put to rest – but given the new leadership of the MNB from March we always discounted that to a large extent anyway.
In terms of risk premia we think the policy move here will be treated as positive by the markets and as a way of speeding up or easing the path towards an SBA. That may well be an over-reaction in that the FTT on MNB was always going to be an additional hassle on top of an already fraught negotiating agenda, and the FTT itself on banks is still an issue for the IMF at least (and probably the EC as well).
Our core view of an SBA deal by mid-October and only after a degree of market pressure is still in place.
Nomura Emerging Markets Research
Peter Attard Montalto
+44 20 7102 8440