Improving policies but major challenges remain
Overview:
The approval of a huge IMF-led bail-out package in November allowed some stabilisation in Hungarian financial markets. This, however, has proved to be short-lived as market sentiment towards Eastern Europe has deteriorated so far this year. While Hungary continues to face a number of major challenges it is, however, improving its economic policies and seems to be on-track with the Fund as it looks to complete the first review of the US$12 billion Stand-by Arrangement (SBA) in March. The authorities appear serious about implementing a sustained fiscal adjustment that will help reduce some of Hungary’s key economic vulnerabilities. The government is extremely unpopular but has little option but to carry on its policy course for now although implementation risks rise as elections approach next year.
Recommendation:
The deterioration in the global economic outlook will require adjustments to the government’s economic program. Moreover, the economic fundamentals are themselves adversely impacted by market sentiment as a weak currency exacerbates the external debt position and exacerbates currency mismatches. Hungarian policies seeem to be moving in the right direction and the currency now appears undervalued after a dramatic sell-off. We move from underweight to neutral on the forint on a medium-term view. We remain neutral on local rates and underweight on external debt. The central bank (MNB) will only recommence rate cuts when the currency starts to recover.