IMF and EU conditions to a new credit line could restrict some of Hungary’s more controversial economic policies, analysts say.
In particular, analysts believe the IMF will look to curtail prime minister Viktor Orban’s scheme to force banks to allow early foreign-currency mortgage repayments at government-decreed discounts. The policy has cut deeply into regional banks’ third-quarter profit numbers this year, including those of Erste and Raiffeisen.
Last month, Hungary said it was reopening talks with the IMF after ratings agencies said they were considering downgrading the country’s debt to junk status – partly because of the expected economic impact of Orban’s banking policies.
With slowing eurozone growth also hitting Hungary’s exports, the forint has lost almost 20% of its value since the summer, and government bond yields have shot up to levels not seen since 2009.
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| Hungary’s total public debt-to-GDP |
The state is expected to post a small net surplus this year, but there is concern over the sustainability of its fiscal health. The IMF has criticized so-called crisis taxes levelled at sectors, including banks and telecoms, for example. Raiffeisen analysts estimate the state will slip to a deficit of 3.8% of GDP next year. Hungary’s total public debt-to-GDP is around 70%. The government says it expects a deal with the IMF by early next year, but its pronouncements indicate negotiations might not be easy. "No one can limit Hungary’s economic sovereignty – that’s the basic tenet of the government’s philosophy," Orban told a radio show after announcing talks with the fund.
Despite talks with the IMF, Moody’s lowered Hungary’s sovereign debt rating to junk status last month. If Standard and Poor’s or Fitch did the same, it could cause Hungary to be expelled from key bond indices, according to research by Barclays Capital.
"Increasing market pressure is likely to soften the Fidesz government’s stance vis-à-vis the IMF/EC," Commerzbank said in a research note last month. The institutions would probably not insist on a "large-scale rollback of past measures", said the analyst, but the mortgage-repayment plan could be ended slightly early.
Fitch analyst Matteo Napolitano also believes the IMF could help change Orban’s more aggressive policies towards the banks. "An earlier phasing out of the crisis taxes ... would probably be on the agenda," Napolitano tells Euromoney.