BUDAPEST Jan 27 Hungary's recovery from
recession will be modest this year and next and its economy
needs reforming to boost a potential growth rate that remains
worryingly low, the OECD said in on Monday.
Hungary should also show "extreme caution" about cutting
interest rates further and scale back special taxes, including
levies on the banking system that have depressed lending
activity, the Paris-based body said in a country survey.
The Organisation for Economic Cooperation and Development
forecast growth in central Europe's most indebted nation at 2
percent this year and 1.7 percent in 2015, both unchanged from
its November projections.
"Growth potential is held back by weak investment, low
employment among low-skilled workers and shortcomings in labour
and product markets, making further structural reforms
essential," it said.
"Enhancing competition and the business environment is key
to stronger investment and productivity."
The OECD forecast Hungary's budget deficit just below the
European Union's 3 percent of economic output ceiling for both
2014 and 2015.
It said easing fiscal policy in 2014 - an election year -
looked unnecessary given rising activity. "Budget slippages
would signal the return of an electoral cycle in fiscal policy,
which should be avoided as in 2010."
It forecast debt edging down to 78.4 percent of GDP this
year and further to 77.8 percent in 2015.
Prime Minister Viktor Orban, who has stabilised the budget
with a string of unorthodox measures that include Europe's
highest bank levy and special taxes on the energy, retail and
telecoms sectors, will fight for re-election in early April.
Orban says he has saved Hungary from fiscal collapse but his
policies have drawn much criticism from abroad.
The OECD said while Hungary's special taxes, worth a
combined 1.8 percent of GDP in 2013, helped wrestle down the
deficit, they have also harmed bank lending and undermined the
predictability of the tax system.
"In the longer term, the authorities should scale down
special taxes and replace them with more growth-friendly fiscal
instruments," it said.
The OECD said Hungary's access to international bond markets
had improved but the high share of foreign currency debt would
keep it vulnerable to market volatility and the country should
maintain fiscal discipline to preserve market access.
Hungary should also tread carefully over monetary policy,
having cut interest rates from 7 percent in August 2012 to 2.85
percent now to help the economy recover.
"Volatile external conditions together with the fact that
domestic demand is picking up in any case call for extreme
caution as regards continuing the easing cycle," the OECD said.
"Further rate cuts could increase the risk of a forint
depreciation, which has been avoided over the past two years."
The forint sank to 10-month-lows last week in an
emerging market sell-off.
Hungary - whose government is in a drive to cut household
utility bills - should also move towards cost-reflective and
market-based pricing in electricity and gas.
($1 = 223.56 Hungarian forints)
(Reporting by Gergely Szakacs; Editing by John Stonestreet)