Hungary deficit path credible in s-t, cenbank to cut rates 100 bps in 2007 - OTP

OTP's 2.4% GDP growth forecast for this year is down 0.1 percentage point from the estimate the bank gave in November's “Macro Monitor", but up 0.2 ppt from the government's own estimate. For 2008, the bank's economists expect GDP growth at 3.3% yr/yr.

Real wages are to drop by 4% yr/yr in 2007, which will dampen consumption by 2%, the bank projected.

Investments will decline too, as fewer homes are built and state-funded projects are put off. OTP now expects gross fixed capital formation to go down by 5.9%, as opposed to a -2% forecast in November.

Exports are seen rising by 12% yr/yr in 2007 versus 15.8% estimated for last year, while imports are expected to expand by 9% against 11.5% in 2006. Export growth is to pick up in 2008 to 13.4% with imports rising by 11.8%.

The bank's analysts have already underlined earlier that fiscal adjustment measures were heavily reliant on subsidy reductions. The direct impacts of this on inflation are enhanced by tax and contribution hikes burdening corporations. Inflation is seen peaking at around 9% in spring months, according to OTP, which expects annual average CPI at 7.1%. Yr/yr inflation should drop to 3.8% in 2008 from this year's 4.6%, OTP said.

The bank projects the government's belt-tightening measures will reduce Hungary's public sector deficit from an estimated 9.7% of GDP in 2006 to 6.6% in 2007. The government's official target is 6.8%.

According to OTP, the government will not be able to meet its 2008 deficit target of 4.3% and will be forced to accept a larger gap of 4.7% of GDP.

The bank projects the current-account deficit will narrow to 5.9% of GDP this year from 7.9% in 2006.

OTP Bank also expects the base rate to be cut by 100 basis points to 7.00% by the end of this year.

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