Hungary Is ‘Most Probably’ in Recession, Economy Minister Says

By Zoltan Simon and Chris Burns

Nov. 27 (Bloomberg) -- Hungary, which is sacrificing its growth prospects to accelerate budget-deficit cuts and reduce its reliance on external financing, is “most probably” already in recession, Economy Minister Gordon Bajnai said.

“Hungary is heading into recession, most probably in the fourth quarter,” Bajnai said in an interview with Bloomberg TV in Budapest on Nov. 25.

A recession in western Europe is compounding problems in the region’s emerging markets that are battered by a lack of credit, weaker currencies and waning demand for their products. Hungary’s economy contracted in the third quarter and is set to follow the euro region into its worst recession in 15 years.

Gross domestic product fell 0.1 percent in the three months through September from the second quarter. The government expects the economy to contract 1 percent next year. The euro-area, Hungary’s biggest export market, slipped into a recession in the third-quarter, its first since 1993.

Hungary is accelerating spending cuts after investors dumped local assets during the financial crisis last month on concern the country may be unable to finance its short-term debt, forcing the government to seek international aid.

Prime Minister Ferenc Gyurcsany froze public sector wages next year and cut pensions to reduce the budget deficit to 2.6 percent of GDP from an estimated 3.4 percent this year. Earlier targets were 3.8 percent for this year and 3.2 percent in 2009.

IMF Loan

The government secured 20 billion euros ($25.9 billion) of loans from the International Monetary Fund, the European Union and the World Bank. The central bank raised interest rates to the highest in the EU to defend the forint, which plunged to a record against the euro on Oct. 23.

Monetary policy makers on Nov. 24 unexpectedly lowered the benchmark two-week deposit rate to 11 percent from 11.5 percent, starting to roll back last month’s 3 percentage-point emergency increase on a strengthening currency and easing inflation pressure.

The benchmark is still the highest in the EU and the central bank will probably have room to reduce it further, Bajnai said.

“Now we can start gradually reducing the otherwise huge margin between funding rates of other countries and Hungary,” he said. “It will take time and has to go alongside the recovery of investor confidence in Hungary.”

The Magyar Nemzeti Bank “can’t rule out” cutting the key interest rate further next month on Hungary’s reduced vulnerability in the global financial crisis, Central Bank Vice President Ferenc Karvalits said on Nov. 25.