Country Report Hungary November 2008

Summary

The Economist Intelligence Unit expects the Hungarian Socialist Party (MSZP) to remain in office as a minority government throughout the forecast period, with external 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 yet face an internal 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 as a 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 3.8% in 2009 and to 2.9% in 2010 as commodity prices fall and domestic demand falters.
The current-account deficit is forecast to fall as a percentage of GDP in 2009-10 as depressed domestic demand curbs imports and income debits fall.

Hungary was hit hard by financial turmoil in October, as investors focused on the economy's exposure to several risks. The bond market in effect froze, the forint depreciated sharply and the stockmarket plummeted.
The current economic shake-up will be hard for the economy to weather, but Mr Gyurcsany may benefit politically from his role as crisis manager.
In late October the IMF agreed with Hungary a financing package, worth nearly US$16bn, in support of the country's policies to face the crisis in the short term. The EU and the World Bank have also pledged support.
In return for the support, Mr Gyurcsany has announced that the government will step up its fiscal consolidation effort, mainly by enacting a spending freeze in 2009.
In a radical move aimed at defending the Hungarian currency against speculation, the National Bank of Hungary (NBH, the central bank) raised its base rate by 300 basis points, to 11.5%.
Measured using a three-month moving average, headline industrial output contracted year on year in August for the first time in over six years.