Hungary's `Ad Hoc' Tax Extension May Damp Economic Growth, Analysts Say

Ripe for a short....

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By Zoltan Simon - Nov 11, 2010 2:33 AM PT


(Bloomberg)--Hungary’s decision to extend special industry taxes beyond their planned expiration may undermine efforts to boost economic growth to more than 5 percent by 2014 and meet revenue targets as debt repayments peak, analysts said. Stocks fell the most in six months yesterday in Budapest after Prime Minister Viktor Orban’s spokesman, Peter Szijjarto, said the Cabinet plans to draft new rules to collect revenue from selected industries after “crisis” taxes approved this year end in 2012. The government will negotiate the new tax with companies in 2012, Orban said today in Budapest.

“The equity market crashing tells you what this tax will mean for growth,” Bartosz Pawlowski, an emerging-market currency strategist at BNP Paribas SA in London, said by phone. “The investment environment will be severely hit with companies having less cash to invest, causing potential growth to decline, which is probably the last thing the government wants to do.” Hungary’s reliance on tax increases is stoking concern the European Union’s most-indebted eastern member will shy away from spending cuts as it narrows the budget deficit. Investors have been buffeted by shifts in policy since Prime Minister Viktor Orban was elected in April on promises to end five years of austerity. After a standoff with international lenders, he agreed in September to meet the EU deficit limit next year.

“There is little one can say about yesterday’s events in Hungary except that they pulled the country one major step down the credibility ladder, the main reason for the selloff in equities,” Simon Quijano-Evans, head of emerging-market strategy at Credit Agricole Cheuvreux SA in Vienna, said in a note to clients today.

Forint Falls

The forint weakened 0.8 percent today to 276.66 per euro at 11:30 a.m. in Budapest The benchmark BUX stock index rose 1 percent., paring losses after it fell 4.7 percent yesterday, the most since May 7. Mol Nyrt., Hungary’s largest oil refiner, rose 1.1 percent after tumbling 6 percent yesterday. OTP Bank Nyrt., the country’s biggest lender, increased 0.9 percent after falling 5.2 percent yesterday.

Magyar Telekom Nyrt., which is controlled by Deutsche Telekom AG, and Mol have said they may reduce investments next year. Vienna-based Erste Group Bank AG said yesterday it will cut 9 percent of its workforce in Hungary.

Tax Projection

Orban originally levied taxes on the financial, energy, telecommunications and retail industries through 2012 and said he would use private pension funds to plug budget holes created by switching to a flat 16 percent personal income tax next year. According to the budget draft posted on parliament’s website, the government is now counting on revenue from the taxes through at least 2014. The taxes will raise 348 billion forint ($1.8 billion) in 2011, 260 billion forint in 2012 and 179 billion forint in both 2013 and 2014.

With elections scheduled for 2014, the Cabinet’s reliance on industry taxes for the remainder of its terms shows the government probably won’t tackle structural issues to reduce state spending, said Daniel Bebesy, who helps manage $1.5 billion of mostly Hungarian government bonds at Budapest Investment Management.

“There is no comprehensive plan, only ad hoc solutions,” Bebesy said. “In this kind of environment, where companies are hit with this kind of burden, the government’s growth projections are unrealistic.”

Economic Outlook

The government expects growth to accelerate to 5.2 percent in 2014 from a projected 0.8 percent this year, according to Economy Ministry forecasts. Hungary’s economy contracted 6.3 percent last year, the most since 1991. While the government’s measures are sufficient to meet short-term budget targets, they fail to address the “structural deficit” that may widen the budget gap to 6 percent of GDP by 2014, Standard & Poor’s said Nov. 3. S&P affirmed Hungary’s debt rating at BBB-, one step above junk, with a negative outlook.

Hungary in 2012 will have to start repaying an International Monetary Fund loan, part of a 20 billion-euro ($27.4 billion) bailout obtained in 2008 to avert a default during the global financial crisis. The government decided not to extend the credit line, which expired last month. The volatility of the forint against the euro may show a “notable rise” next year, Carolin Hecht, a Frankfurt-based currency strategist at Commerzbank AG, said in a research note.

Hungary’s currency has fallen 1.9 percent against the euro this year, the worst performance among 25 emerging market currencies tracked by Bloomberg. The forint fell 0.2 percent to 275.09 per euro as of 9:59 a.m. in Budapest.

“The forint is suffering under the pressure of market uncertainty regarding Hungarian refinancing prospects,” Hecht said. “In view of impending funding shortfalls and due to a lack of alternatives, the government might once again apply audacious fiscal measures, which will further increase uncertainty on the markets, leading to higher financing costs.”

To contact the editor responsible for this story: Zoltan Simon at zsimon@bloomberg.net