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IMF bailout a plus for sentiment, but risk of deeper recession looms
( 31 / October / 2008 )
The bigger-than-expected international bailout package pledged for Hungary should give a significant lift to investor sentiment towards Hungarian assets, but the attached conditions may aggravate recession risks already looming over the horizon, London-based emerging markets analysts said on Thursday.
Barclays Capital said in its daily emerging markets research note released in London that the $25.1 billion financial package by the IMF, the World Bank and the EU is a clear positive for Hungarian assets given its sheer magnitude. The IMF involvement also acts as an assurance regarding fiscal austerity even with the upcoming elections in 2010 approaching. This should eventually act as a prop for investor sentiment, Barclays Capital said.
Opposing all this still is the global de-leveraging and financial sector risks, which remain the key. Still, “we believe this should reduce pressures on the forint and local bonds and lead to a relief rally in the near term as shorts are covered and the pace of selling abates”, it added. Barclays Capital said the package also has implications for other new members of the EU as it shows the EU’s willingness to provide medium-term assistance to these states.
It noted, however, that the IMF has already pledged $34.3 billion (14%) out of its total available funds of around $250 billion. The financial organization has so far agreed substantially larger amounts than prescribed by their internal rules. Ukraine is supposed to receive eight times the quota, while Hungary is getting 10 times the quota. The IMF announced that several other countries have asked for financial help. Thus, the IMF’s readily available funds seem to be depleting, Barclays Capital said.
In a separate comment, JP Morgan said the loan amount, larger than the $10-12.5 billion the market had anticipated, should help calm concerns about Hungary’s ability to meet its external debt maturities, although “we would expect only a small portion of these loans to actually be taken”. While the IMF package helped to avert a crisis, however, the conditionality attached to the loan implies a significantly worse growth outlook next year. “We now expect 2009 GDP to contract by 1.5% ... with risks of a deeper recession as a result of significant cuts in fiscal spending”. On the positive side, such a tight fiscal policy, coupled with falling oil prices, should allow the MNB (National Bank of Hungary) to ease monetary policy in a credible manner next year, JP Morgan said.
MTI-Eco