The koruna firmed to four-month highs just ahead of a release of the CNB Minutes, which have shown that the Bank Board has remained divided in an issue of FX interventions against the Czech currency. Interestingly, some board members even ‘expressed doubts about whether using the exchange rate was the correct response to a negative demand shock in the current situation and whether the associated rise in cost-push inflation might give rise to another drop in private consumption and to lower economic activity’. In our view, this is a really fundamental question whether FX interventions make any sense.
Meanwhile, the Hungarian government presented 2014 budget proposal to the parliament. The miles stones of the planning are the following: 2% YoY GDP growth, 2.4% YoY average inflation, 1.5% YoY households’ consumption and 296.9 average EURHUF exchange rates. Although compared to the previous years, government used more conservative assumption regarding the macroeconomic orbit; the above mentioned forecasts are still on the optimistic side of the market expectations.
The budget is planned with HUF925bn deficit according to GFS (cash flow) methodology, which is 3% of GDP, but based on ESA95 methodology including also the local governments the planned deficit is 2.9% of GDP, just below the 3% of GDP Maastricht criterion.
All in all we see that the 2014 budget proposal is much stretched already and the risk is quite high that expenditures may not be well controlled in election year. We calculated roughly 0.5-0.7% of GDP slippage on revenue side as well, so it looks like that the built in reserves has to be used immediately to be able to keep the budget deficit at 3% of GDP. If there will be any negative shock compared to the government’s relatively optimistic outlook, the government has to implement measures and adjust the budget in 2014 again (this year budget was changed 7 times).
Although the government would like to avoid the restart of excessive deficit procedure, we see substantial risk that the European Commission may state strong recommendations to Hungary to keep tight fiscal policy already in 1Q14. We expect that the government may have to adjust the 2014 budget around HUF150bn or 0.5% of GDP in next year, but most likely it will be done only after the parliamentary election in May-June.