Country Report Hungary February 2009

Outlook for 2009-10

• The Economist Intelligence Unit expects the Hungarian Socialist Party (MSZP) to remain in office as a minority government throughout the forecast period, with support from the SZDSZ-Hungarian Liberal Party (SZDSZ).
• The position of the prime minister, Ferenc Gyurcsany of the MSZP, has been strengthened in the short term by the financial crisis, but he could face a leadership challenge before the general election in 2010.
• The renewed effort by the government to keep the public finances in check in return for financial support from multilateral agencies means that budget deficits will remain below 3% of GDP in 2009-10.
• Real GDP is forecast to contract in 2009 as further austerity measures hit domestic demand and recession in the euro area curbs exports. The economy will return to positive growth in 2010 as the euro zone recovers.
• Average annual inflation is forecast to fall to 2.9% in 2009 and to 2.7% in 2010, as commodity prices fall and domestic demand falters.
• The current-account deficit is set to average around 4% of GDP in the forecast period as depressed domestic demand curbs imports and as income debits fall.

Monthly review

• The MSZP has proposed significant reductions in the number of parliamentary and local government representatives, as well as a simplification of the electoral process.
• In January Hungary hosted an international conference on the Nabucco gas pipeline project.
• The managing director of the IMF made an unscheduled visit to Hungary in January to meet with leaders of the government, the National Bank of Hungary (NBH, the central bank) and the political opposition.
• Contrary to expectations, the IMF voiced no criticism of Hungary's policy steps so far, but indicated that the government will have to adopt additional measures owing to the increasingly difficult economic environment.
• The MSZP plans to reduce taxes and labour contributions, for which an increase in consumption and wealth-related taxes will compensate.
• The NBH has continued to cut its main policy interest rate, with a reduction of 50 basis points in January, bringing the rate to 9.5%.
• The unemployment rate rose to 8% in the fourth quarter of 2008, from 7.7% in the previous quarter.

Source: Country Report