BUDAPEST, July 28 (Reuters) - Hungary's prime minister said on Wednesday that one or two downgrades of the country's credit rating were likely after it broke ties with the IMF, but he said its finances were stable and the government should focus on growth.
Prime Minister Viktor Orban, who confounded financial investors less than two weeks ago by halting talks with Hungary’s international lenders, made it clear that his centre-right government would prioritise growth over budget austerity.
Orban reiterated that Hungary was strong enough to finance itself from the markets without a renewed deal with the International Monetary Fund (IMF), which together with the EU rescued Hungary from financial meltdown in October 2008.
The current IMF deal expires in October, and the government had wanted to seek a new safety net-type deal for 2011-2012, according to an earlier plan revealed by the economy minister before the talks with lenders fell through.
Two ratings agencies signalled last Friday that they could cut Hungary’s rating after the government called a halt to talks on a review of its $25 billion aid deal with the IMF and signalled it did not want to renew its agreement.
Investors sold Hungarian assets in response, although some analysts say the government’s argument against IMF budget cut demands is reasonable. Analysts have also said that Orban’s Fidesz party might still come back to the table after October local elections which Fidesz wants to win by a big margin.
"The country’s financial situation is stable and predictable and it gives good hope for us to continue with structural changes and also restart the economy’s growth," Orban told a business conference on Wednesday.
Orban has said the government will meet this year’s 3.8 percent of GDP deficit goal, specified in the current IMF deal, but will allow the deal to expire in October.
"Let us also look at the suspension of IMF talks and the subsequent qualifications and downgrades, of which we can still expect one or two … There will still be one or two downgrades but these will not cause special disturbances," Orban said.
"Clearly these are not pleasant things, but they cause only temporary (market) turmoil, after which both the forint’s exchange rate and the country’s bond issuances and sales … return to levels where the country’s operation can be considered normal. So going ahead with this policy makes sense."
The forint <EURHUF=D2> fell more than 3 percent last Monday after talks with lenders were halted, but it has recovered since then, and it did not react to Orban’s comments.
"I think overall, given a lack of market reaction to what happened, he (Orban) has been emboldened and he is going to push markets, EU and IMF as far as he can go," said Peter Attard Montalto at Nomura in London.
"Everyone is now on holiday, but I think we will see the rating agencies, IMF and EU all pushing back into late August."
BOOSTING THE ECONOMY
Economy Minister Gyorgy Matolcsy said at the same business forum that Hungary needed to boost economic growth to achieve a sustainable fiscal balance — and not the other way round.
The new government, which took power in May, says it wants to break with a failed policy of recent years that made achieving a fiscal balance a priority on the view that a balanced budget would generate economic growth later on.
"We say we need to sit on the horse the other way around … we need to invest cleverly. Then jobs are created, from which stems growth and the result will be (fiscal) balance," Matolcsy said.
He said the government would launch a 20-year development plan that would create a million jobs in the first decade.
He said the plan aims to devote mainly EU funds to key areas such as the health industry, real estate development, green projects and small and medium-sized businesses.
Orban’s government has refused to accept demands from its international lenders to back down on a new tax on financial institutions in 2011 that the government says will enable it to plug budget holes this year and next.
Orban, who is looking for more fiscal room to manoeuvre next year, also said on Wednesday that Hungary needed to produce the most transparent budget in Europe.
He wants a "uniform European agreement" that would give all countries under the Excessive Deficit Procedure, including Hungary, the same timeframe to cut their deficits to the required 3 percent level. Hungary has to cut its deficit below 3 percent next year under current rules.
