Hungary's Austerity Avoidance Right Decision: Minister

As its European neighbours continue to struggle, Hungary, which turned down part of an International Monetary Fund/European Union loan last year, has won grudging international acceptance for its focus on job creation.

Budapest, Hungary
Allan Baxter | Digital Vision | Getty Images
Budapest, Hungary

“We are confident that we can keep our promises,” Zsolt Becsey, Hungary’s minister of state for international economic relations, told CNBC on Thursday.

“We have started the restructuring of systems such as education and the labour market.

“We were the first country which asked for the IMF loan but we are in good shape now,” he said.

“Our new government has decided to fund ourselves from the market. That’s why we decided to suspend the last tranche from the loan and why we have launched a new program,” he said.

The center-right government elected last year in Budapest has brought in a number of radical economic measures, including crisis taxes on key industries and the effective nationalization of private pension fund assets.

It hopes to deliver growth of 3-5 percent each year between 2012-15 and cut Hungary's state debt level to around 50 percent of GDP by 2018.

It has also cut down the substantial welfare state, and hopes to create 300,000 new private-sector jobs by 2014 and one million by 2020. Just 55 percent of the Hungarian population, compared to the 65 percent EU average, work full-time, while 700,000 out of its 10 million population are registered as disabled.

In a move which caused controversy with the EU, the government appointed four external members to the central bank’s monetary policy committee, which ECB President Jean-Claude Trichet warned could lead to the European Commission suing Hungary.

Crisis taxes on more profitable industries were imposed.

“These crisis taxes are negotiated with industries where the profitability is very high,” Becsey said.

“We also don’t have full privatization yet.”

"We have had a turnaround in terms of perception of where the government is heading," Agata Urbanska, senior economist for emerging markets at ING, told CNBC.

"This (debt reduction target) is going to be reached by stages, but in 2011, they're still going to rely on measures like taking over the assets of the private pension funds."

"There's still an issue believing in what the government promises today and that still has to be delivered."

Neighbor Romania imposed brutal austerity measures after a 20 billion euro bail out from the IMF and EU, and has just emerged from two years in recession.

In February, the executive board of the IMF praised the country’s ongoing recovery, but warned that the economy was “still fragile”.

On Monday, ratings agency Fitch revised its outlook on Hungary’s debt from “negative” to “stable” and affirmed its long-term foreign and local currency debt ratings at ‘BBB-’ and ‘BBB’, respectively. This was one of the first international recognitions that the government’s plan is taking effect.

“The revision reflects the fiscal policy targets and measures announced by the Hungarian government,” said Ed Parker, managing director of Fitch’s sovereign group. He added that the measures “have increased confidence that the budget deficit will be reduced to below 3 percent of gross domestic product by 2012 and the government debt ratio will be put on a sustained downwards path, easing downside risks to sovereign creditworthiness”.

Fitch’s review of Hungary’s policies was not completely positive, with Parker pointing out that “significant implementation risks to the fiscal consolidation program” still remain.

The agency also believes that Hungary’s ability to cut public debt will be closely tied to the pace of economic growth.

Hungary remains committed to joining the euro, despite the comparative weakness of the euro zone at the moment.

“First of all, it’s an obligation,” Becsey, who is a member of the Fidesz Party, explained.

“There are more advantages to joining than disadvantages. We have debated it several times and have come to this conclusion.

“We are very much dependent on trade with the euro zone. It’s absolutely the dominant in our exports. We are much more integrated than the UK, for example,” he said.