VIENNA (Reuters) - Hungary should not need to use the remainder of its package of International Monetary Fund-led aid, though its recovery remains fragile as it returns to market financing, the central bank’s deputy governor said on Tuesday.
The central bank will continue to aid recovery but further cuts in interest rates will have to remain predictable and gradual to maintain investor confidence, Ferenc Karvalits told the Reuters Central European Investment Summit.
“The current government would like to show, and up until now, they’ve been successful, that they can return to market financing,” Karvalits said.
“Therefore we expect that in the upcoming period, until the elections, we won’t need additional sources from the IMF or the from the European Union. These are just safety cushions.”
Hungary was the first European Union country to seek international aid late last year and secured a package of around 20 billion euros from the IMF, EU and the World Bank to prevent banking, budget and balance of payments meltdowns.
It has so far drawn around 14 billion euros of the package.
The country faces general elections in April or May next year where the opposition conservative Fidesz is almost certain to defeat the ruling Socialists and has promised to rewrite the 2010 budget if it wins.
Karvalits said that the central bank remains ready to continue with rate cuts after 200 basis points worth of easing to 7.5 percent over the past three months, but would follow a gradual approach.
“We are thinking in terms of gradual rate cuts because we’d like to be more predictable,” Karvalits said. “We don’t want to make mistakes with very quick cuts, then turning back.”
“Inflation and real economic growth still call for more monetary easing (but) we have to make our decisions according to the external conditions as well.
Signals from the European Central Bank and the Fed show monetary tightening is still some way off and Hungary has time to gradually cut its rates and not worry about going into a tightening cycle on core markets, he added.
“The BOE, the Fed and the EBC signaled that they will keep rates at low levels for a while, so it gives some room for us,” Karvalits said.
Ratings agency Moody’s said on Tuesday that while Hungary’s rating outlook remains negative, it could be elevated to stable if fiscal stabilization continues and structural reforms are widened.
Karvalits said that the country’s bank sector has been more resilient to this year’s contraction — seen at 6.7 percent of the economy — and profitability has been better than expected.
“Significant portfolio deterioration will take place but the profitability will remain positive in most cases,” Karvalits said. “And according to our base case (scenario) in no instance will capital adequacy cross the 8 percent level.”
The central bank has predicted non-performing loan rates in the bank sector to rise to 13-15 percent by the first quarter of next year from around 4 percent at the start of 2009.
Karvalits said Hungary’s economy, after contracting in both 2009 and 2010, would expand by 3.5 percent in 2011 as efforts to turn the economy around will have matured and the external environment improves.
“Net exports, investments, private consumption, government spending, all together compared with this year, will be in an expansionary mode,” Karvalits said. “And therefore we assume that in 2011, we’ll be around 3.5 percent, which is I think already over the potential.”
Reporting by Balazs Koranyi; editing by Patrick Graham