Hungary Sees Contracting Economy, Cuts Deficit Target

By Zoltan Simon

Oct. 28 (Bloomberg) -- Hungary's government said it expects the economy to shrink next year for the first time since 1993, as the effects of the global financial crisis that ravaged the country's markets deepen.

The government, which expects gross domestic product to contract by 1 percent, will seek to cut the budget deficit more than earlier planned to secure financing from the International Monetary Fund and the European Union and stabilize the economy, Prime Minister Ferenc Gyurcsany said in Budapest today.

Western Europe is on the brink of a recession, exacerbating problems for neighboring emerging economies, which were scorched by investors dumping riskier assets in a flight to safety. Hungary needs international support to make sure it can keep paying back loans, the premier said.

The package will ``avert the threat of a state default even in the most extreme market conditions,'' Gyurcsany said in a meeting with parliamentary party leaders. The government is securing funds at a time when ``there is no market for Hungarian government bonds.''

The MSCI Emerging Market Index has lost 40 percent of its value this month and fell to a four-year low yesterday. The Hungarian forint is the world's fourth-worst performer against the euro in the past three months, behind the Icelandic krona, the Polish zloty and the South Korean won.

Forint Surges

The forint rose as much as 3.2 percent to 262.48 per euro today and traded at 262.86 at 1:51 p.m. in Budapest. The currency, which fell to a record on Oct. 23, has gained more than 3 percent since the IMF on Oct. 26 said it would announce a ``substantial financing package for Hungary.

Hungary lined up help from the IMF and the EU after an emergency loan from the European Central Bank failed to stabilize local financial markets. Stocks, bonds and the forint plunged this month on concern that the country may face difficulty in financing its current-account and budget deficits as global credit dries up.

The financing package will be ``significant'' and ``in line with market expectations,'' Gyurcsany said. Orsolya Nyeste, an economist at Erste Bank AG in Budapest, yesterday estimated that the loan may be worth $12.4 billion.

The government is freezing salaries and canceling bonuses for public workers and reducing pensions to cut the budget deficit to 2.6 percent of GDP, rather than an earlier plan of 2.9 percent. Hungary estimates a gap of 3.4 percent this year, after 5 percent last year and a record 9.2 percent in 2006.

The IMF and the EU conditioned funds on capping spending and avoiding a drop in revenue, Gyurcsany said. The government has postponed tax cuts aimed at boosting growth to focus on reducing reliance on external financing and cut this year's bond sale plan by 200 billion forint.

The debt management agency was forced to cancel several auctions because of a lack of buyers at levels it would accept.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net