The Hungarian forint was hit by negative domestic fiscal news on Thursday. The unit eased from 262.30 to 264.75 EUR/HUF. While the industrial output surprised heavily on the downside as it came deep below market consensus (1.8% y/y growth) the crucial negative news was a statement of Prime Minister Gyurscany concerning the budget deficit. Gyurcsany said in Parliament that this year’s budget deficit would be around 8% GDP (with pension reform correction) even after fiscal adjustment measures (without pension reform correction the budget deficit will reach 9.4% GDP).
This is a huge upward correction since the previous target was set at 4.7% of GDP. It seems that an upward revision of the budget target becomes a tradition in Hungary. Hungary misses its budget target the fifth time in row. In 2004 the budget deficit target was in October changed from 4.6% to 5.3% GDP and finally ended at 6.1% GDP. Subsequently Economy Minister Janos Koka said that the target for 2008 budget deficit (3% of GDP) remains, which should allow the country to adopt the euro in 2010. This statement calmed the market down, though we think 2010 target is completely unrealistic. Hungarian forint retreats on deficit news.
Today the forint could get positive impetus from early morning news concerning preliminary April external trade deficit. It reached just 187.6 mil. EUR, much lower than market consensus 440mil EUR. Also details of 1Q 2006 GDP (4.6% y/y growth) as well as better-than-expected May budget deficit published yesterday late in the afternoon could provide support for the currency. Nevertheless we do not think these positive macroeconomic news can counterbalance negative impact of yesterday’s Prime Minister statement thus we expect the fragile mood before Saturday’s details on fiscal amendments will persist.
(CSOB - Investment research)