Economy 16 April 2013, 2:06pm

How would Hungary make HUF 100 bn c.bank loss disappear?

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It is possible that the Hungarian government has only bought itself some time with its updated Convergence Programme that lacks additional corrective measures and a month from now new fiscal adjustment steps will be announced, analysts noted after Economy Minister Mihály Varga disclosed the programme along with key macro forecast revisions. The biggest question at this point is how the central bank’s (NBH) HUF 100 billion loss should disappear this year, as the cabinet envisaged. Because the bank’s measures announced so far will not help in that.

The government’s updated Convergence Programme(CP) sent to the European Commission lacks new fiscal measures and sees the missing revenues sufficiently covered by budget reserves, noted Eszter Gárgyán, analyst at Citibank in Budapest, in a research note on Tuesday.She projects the 2013 deficit around 3.1% of GDP without additional measures but she also expects that the government may still modify details of the financial transaction tax (FTT).

EcoMin Varga said that revenue collection from the FTT from commercial banks may be 0.25% of GDP (HUF 80bn) lower than the original plans. The analyst noted that the government still expects full realization of planned revenues (net 0.3% of GDP) from electric road toll systems and the online connection of cash machines to the tax authority, which have been questioned by the European Commission.

“Other changes would net out each other as the improvement in local municipalities balance (cc. 0.2%) may offset smaller revenue shortfall items," she said. Overall, the government lowered budget reserves from 1.3% to 0.5% of GDP without adjusting the budget.

In Gárgyán’s view, the CP’s 1.9% GDP growth assumption for 2014, lower tax revenues and the 2013 NBH loss “pose key risks to the official 2.7% target" (which was revised upwardly from 2.2%).

“The government calculates negligible NBH loss against earlier assumptions of 0.3-0.4% of GDP loss at the NBH in 2013 (to be bailed out by the budget in 2014). This suggests a sharp reduction in sterilization costs by interest rate cuts and/or the use of FX reserves (the NBH would realize profits between the spot FX and the input EURHUF levels of around 272)," Gárgyán said.

“Minister Varga’s comments yesterday that the government supports a shift towards local currency funding (exchanged by the NBH to roll over maturing FX debt) may provide a basis for increased FX reserve sales," she added.

Budget reserves for 2014 were lowered to 0.5% of GDP, which together with the assumed 1.9% GDP growth “points towards deteriorating cyclically adjusted structural balance, which may challenge an EDP exit."

In order to exit the EDP the EC’s forecast should remain below 3% for 2013-2014 with improving structural balance.

“The EC may attribute most of the better 2012 outcome to one-off factors and stick to its view of implementation risks to the questioned revenue items," the analyst said.

The updated Commission estimates will be presented early May (Spring Forecast).

Gárgyán expects the government to take additional steps in May ahead of the June ECOFIN decision about the EDP, likely focusing on underperforming revenue items.

“Given the political nature of the decision, assessment of the constitutional amendments - likely to be finalized by early June - may also influence the outcome," she concluded.