Boston, MA -- (SBWIRE) -- 09/05/2013 -- Hungary's economy seems to have turned a corner in H113, with real GDP data for Q113 showing that the country is no longer in a technical recession. A number of leading indicators point toward a recovery over the next two years, however, due to the country's high corporate tax rates, a difficult external environment and unpredictable government policy, the turnaround will occur at a subdued pace.

We believe that the governing Fidesz party, led by Prime Minister Viktor Orban, is on course for victory in the April 2014 general election. Fidesz has held a commanding lead over the main opposition Socialists (MSZP) in all national opinion polls in 2013. The MSZP are set to form a centre-left electoral pact with former PM Gordon Bajnai's 'Egyutt 2014' (Together 2014) alliance, however, even with the pooled support of both these parties we do not see it posing a challenge to Fidesz's chances of re-election.

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After exiting the EU's Excessive Deficit Procedure (EDP) in June, we believe that the government budget deficit will meet the EDP criteria in 2013, coming in at 2.9% of GDP, below the 3.0% threshold. In 2014 we forecast the deficit to grow to 3.1% of GDP. However, the EU has in the past allowed a certain amount of flexibility in its criteria for being placed under the EDP, usually extending to around 0.5 percentage points. Therefore we do not see Hungary re-entering the budgetary measure in the next two years.

Major Forecast Changes

We have revised our forecast for Hungary's real GDP to -0.1% in 2013, from -0.3%. This is due to an improving consumer picture boosting household spending, with real wages continuing to rise, retail sales increasing and consumer confidence slowly picking up.

Our forecast for Hungary's policy interest rate, the two week MNB bill, has been revised downwards to 4.00% by end-2013, from 4.50% previously. This is as a result of low consumer price inflation (1.8% y-o-y in May), which we have also revised down our year-end forecast for, from 3.3% to 2.4%. The rate of inflation is set to remain subdued as a result of state-mandated energy, water and sewage price cuts, as well as moderating fuel prices.

Key Risks To Outlook

If consumer price inflation falls further than expected on the back of the next round of energy price reductions we could see cuts to the policy rate beyond 4.00%. With the volatility already experienced in Hungary's currency and sovereign debt markets in May and June, unexpected cuts to the policy rate could lead to a selloff in the currency, or a spike in local debt yields.

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