Hungary to Be World’s Fiscal Leader, BofA Says

By Tasneem Brogger and Agnes Lovasz

Oct. 27 (Bloomberg) -- Hungary is poised to emerge from the global recession as a leader in fiscal health as years of economic pain brought on by government austerity measures pay off, according to Bank of America Merrill Lynch.

“Hungary’s massive fiscal tightening contributed to its economic decline,” said Radoslaw Bodys, central and eastern Europe economist at BofA Merrill Lynch Global Research, in an interview. “This is why Hungary is going to be the world’s fiscal leader next year.”

The nation that joined the European Union in 2004 has relied on a 20 billion-euro ($30 billion) International Monetary Fund-led loan since its debt-reliant economy succumbed to the credit crisis, forcing it to curb spending and levy more taxes to comply with the fiscal terms of the bailout. The efficiency of budget cuts will leave Hungary with a 1.3 percent surplus next year, adjusted for cyclical swings, Bodys estimates.

“In 2011, Hungary will probably be one of the only major countries in the world likely to be easing fiscal policy when the whole world is tightening,” Bodys said, referring to the 40 economies that BoA tracks worldwide. “That’s what makes Hungary in the longer term perspective quite an interesting and potentially a very strong outperforming country.” He expects the economy to grow as much as 5 percent in 2011.

The country’s fiscal outlook also means it’s one of the best placed in the region to adopt the euro, Bodys said.

“Honestly, I think Hungary can do it any time,” Bodys said. “I can imagine a scenario in which they enter the exchange rate mechanism even next year, and definitely before Poland.”

Reverse Measures

The country’s bond market reflects investor anticipation of a fiscal recovery.

The yield on the three-year 6.75 percent note has shed 1.7 percentage points in the past three months to 6.95 percent on Oct. 26, according to Bloomberg prices. That’s lower than the benchmark two-week deposit rate, which the central bank cut to 7 percent on Oct. 19. The yield on Poland’s comparable three-year note is up 4 basis points in the same period at 5.43 percent.

Hungary’s borrowing requirement will fall 24.8 percent next year, compared with a 24.4 percent increase for Poland, Bank of America Merrill Lynch estimates.

The budget deficit will improve to 3.8 percent of gross domestic product in 2010 from 3.9 percent this year, the government of Prime Minister Gordon Bajnai estimates.

The economy will contract 6.7 percent this year and 0.9 percent in 2010, the government predicts, before returning to growth in 2011.

‘Very Simple’

Hungary is preparing for a fifth year of spending cuts to meet the terms of the bailout. The government has also raised taxes and trimmed subsidies since 2006 to narrow the deficit, the widest in the EU at the time, after burgeoning expenditures led to the nation missing its targets for the shortfall every year between 2001 and 2006.

Growth will pick up as years of fiscal prudence allow authorities to ease policy as other countries are forced to reverse stimulative measures deployed through the crisis, according to Bodys.

“Growth is going to recover while inflation and the fiscal deficit will remain very low,” he said. “That will allow them to grow even faster in 2011 because they will be able to cut taxes in that year. The growth outlook looks good and the appreciation pressure on the currency will be strong. Being positive on the Hungarian fixed income market is very simple.”

Currency Play

Hungary’s potential to be central Europe’s top performer marks a reversal of the status quo, which ranked Poland the “strongest and Hungary the weakest,” Bodys said. “I think this is going to remain the case next year, when we expect Poland to grow 3.5 percent and Hungary to grow 0.2 percent. I think this may reverse from 2011.”

While buying Hungarian bonds over Polish debt based on “purely fundamental aspects” makes good sense, according to Bodys, Poland may reward investors who only buy the currency.

“Poland’s not a clear fixed income play; I would say it’s a clear foreign currency play,” Bodys said. “I’m very bullish on the Polish economy over the next year, which means the pressure on the currency will be clearly towards an appreciation.”

Poland is the only member of the European Union to have avoided a recession since the credit crisis started. Output grew 1.1 percent in the second quarter, and will probably expand 0.9 percent this year, the Finance Ministry estimates. The economy will grow 1.2 percent in 2010, according to the government.

“From the purely fundamental macroeconomic perspective the appreciation outlook of the zloty currently is the strongest since early 2004,” Bodys said. “This is mainly a function of growth and trade balance dynamics. What it means is that the currency is going to appreciate and you don’t want to miss that.”

To contact the reporter on this story: Tasneem Brogger in London at tbrogger@bloomberg.net