BRUSSELS (MNI) – Financial assistance from the International
Monetary Fund and the European Union could help Hungary weather a
challenging domestic economic environment and spillover effect from the
Eurozone debt crisis, but Budapest would need to commit to reforms, the
IMF said on Wednesday.

“A fund-supported program in concert with other international
lenders, which would require a strengthened policy framework and strong
ownership by the authorities, could relieve some of the constraints
facing the Hungarian economy,” the IMF said in a report.

Budapest approached the IMF and the EU for a financial assistance
package in November last year but talks broke down over concerns that
new laws implemented by the Hungarian government would undermine the
independence of the country’s central bank. EU officials are also
concerned about freedom of the press and the judicial system in Hungary.

EU finance ministers this week said that Hungary needed to do more
to keep its fiscal deficit below the EU-agreed 3% limit. According to
European Commission estimates, Hungary’s public deficit is expected to
reach 3.25% of GDP in 2013.

The IMF recommended that authorities tackle bottlenecks that impede
investment and implement reforms to improve the business environment,
competitiveness and labour market.

Echoing recommendations earlier this month from the European
Commission, the IMF urged Budapest to continue with fiscal reforms
despite the weaker economy and to concentrate on long term measures.

Hungarian authorities should also develop a “coherent tax and
expenditure policy mix,” they said.

Monetary policy should also remain tight to contain inflation and
support the Florint, especially given banks’ exposure to
foreign-currency denominated mortgages, the IMF report said.

Although liquidity appears adequate in the Hungarian banking
sector, funding has become increasingly short term and expensive, and
non-performing loans to firms and households have risen to 14%, the IMF
noted.

According to the IMF, Hungary’s economy managed growth of 1.25% in
2011, thanks to strong links with Germany’s resilient export sector, but
domestic demand contracted for the second year in a row.

The economy is vulnerable to further economic weakening in the rest
of Europe, the IMF warned.

–Brussels bureau: +32495228374; pkoh@marketnews.com

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