Thursday, September 2, 2010
, Posted by Usman Ali Minhas at 8:25 AM
Highlights
- Budget deficit goal widened by 1.7pp to 4.2% of GDP – no consolidation in public finances underway Banking sector tax postponed for the time being MoF: steady short-term debt refinancing – new bond placement ahead to fill the budget gap Exchange rate eased on announcement of banking sector tax GDP down 2.5% y/y in 2Q Retail trade turnover return to the black
Budget rebalance: Fiscal policy course unchanged
After several weeks of speculation regarding potential action on the revenue and expenditure sides, the government decided to maintain the status quo. Fortunately, the widely discussed Hungarian-style banking tax has at least been postponed, thus limiting the potential negative effects, particularly the potential withdrawal of capital/depreciation pressures and more scarce and expensive credit. VAT remained flat at 23% and increased excise duties on cigarettes and gasoline were the sole measure to boost the revenue side. Along with no additional tax burden, the government failed to present a stronger commitment towards consolidation on the revenue side, as public sector wages and pensions remained untouched. As a result, the updated budget mathematics confirmed the under-performing revenue side (revenues are expected to be 4.0% lower than initially planned, adding HRK 4.5bn to the budget gap; the initial gap was set at HRK 8.6bn, an amount fully utilized already in January-July). Despite the proclaimed savings on expenditures (HRK 1.5bn), the revenue side should miss the target by almost 1% (HRK 900mn), up almost 2% compared to 2009. The deficit target for 2010 has therefore been revised by 1.7% of GDP to 4.2% of GDP (HRK 14bn), implying the need for additional financing in the region close to EUR 1bn. Details on financing actions were not revealed, but if the external environment would allow it, we think it is likely that the government would tap external markets. Nevertheless, domestic banks are likely to step in if global market sentiment deteriorates. Still, with public debt to GDP approaching the 60% threshold, and with a low likelihood of stronger fiscal consolidation in the election year 2011, risks remain pronounced. Some optimism comes from the announced fiscal responsibility law, which should cap the 2011 budget at this year’s level. However, given the level of fiscal credibility, we take this with some reserve.
