IMF Expected From Hungary to recover slowly From Crisis

The IMF expects the economy to contract by 1 percent next year and grow by only 0.6 percent in 2010, the text of the report, linked to Hungary's request for a standby loan last month, said. The report was published on the IMF's website on Monday,

Hungary's current account deficit, meanwhile, is projected to narrow to 2 percent of gross domestic product next year from an expected 6.2 percent this year, the report said.

"It is projected to drop by more than 4 percentage points of GDP between 2008 and 2009, mainly due to the depreciation of the real exchange rate ... and lower growth. The process will be driven primarily by a sharp contraction of imports," the IMF said.

It said economic growth is expected to reach its estimated potential of 3 percent only after 2011, due to a slowdown in Western Europe, Hungary's main export market, and the global deleveraging process.

"In a difficult global environment and with low domestic demand, the economy is projected to recover only gradually," it said.

Hungary secured a $25.1 billion financial rescue package from the IMF, the European Union and the World Bank last month in a bid to shore up its falling currency and financial markets.

The IMF financing was linked to strong commitments on the government's side to cut the budget deficit further and cut spending, mainly public sector wages and pensions.

The IMF said sticking to these plans was of key importance and urged broad political consensus on structural reforms.

It also highlighted the fact that Hungary's external financing need would stay high despite a sharp fall in the current account gap next year.

The gross external financing requirement is still projected at about 39 billion euros through the end of 2009, the IMF said.

Much of this financing is expected to be covered through foreign direct investment, net positive capital transfers with the European Union, portfolio flows, and bank and corporate foreign financing, leaving a 20 billion euro financing gap.

"Commitments by the European Union (6.5 billion euros) and the World Bank (1 billion euros) will lower the financing gap. Absent such financing, gross reserves would deteriorate substantially," the IMF said.

Hungary expects to sign the loan with the EU soon.

The IMF also warned monetary policy must remain cautious, after the central bank hiked interest rates by 300 basis points to 11.5 percent last month.

"With the risk that global deleveraging may continue to put downward pressure on the exchange rate (which could have inflationary consequences), monetary policy will need to remain vigilant and premature easing will be avoided," it said.