Hungarian government bonds and the forint still face tough times despite government plans to stick its ambitious fiscal targets for the next year. While there are obviously negative spill over effects from the euro debt story, the forint and bonds have continued to underperform the region as recent measures towards the banking sector weigh on Hungary’s markets.
Regarding Hungary’s fiscal plans, recall that the government bets on 1.5% GDP growth for 2012 and plans a HUF 1 trillion fiscal improvement to meet the deficit target (deficit of 2.5% GDP). Most of these measures will be achieved by cutting expenditures.
The MinFin said HUF 250 bn in the Stability Fund established earlier would be added to the budget base, budget expenditures would be reduced by HUF 303 bn and budget revenue would be raised by HUF 445 bn due to tax changes and other revenue-side measures. The government would raise Hungary's VAT rate from 25% to 27%. HUF 150 bn in extra revenue from the increase will go into the National Protection Fund.
Although higher VAT is certainly good for boosting budget revenues, it would be seen in higher inflation and further diminishes the probability of rate cut. Weak forint, rising inflation and elevated country-risk premium (CSD) should keep the National Bank of Hungary in neutral position even during upcoming meeting (scheduled for Tuesday).
CDS Hungary 5Y