This article is a guest contribution by Mark Mobius, Vice Chairman, Franklin Templeton Investments.
Following the recent Greece crisis, there have been several concerns raised about the debt situation in Hungary.
The Hungarian market was one of the top performers in Eastern Europe with the MSCI Hungary Index returning 78% in US Dollar terms in 2009. The market significantly outperformed its regional peers – Poland and the Czech Republic. In the first five months of 2010, however, the market was down 12% in US Dollar terms, mainly due to a 23% decline in May alone on concerns that Hungary could face similar financial problems as Greece.[1]
Although the ratio of government debt to GDP is relatively high at 78.2% when compared to other emerging markets, it is not as high as levels reached by some developed nations recently. Greece, for example, has a public debt to GDP ratio of about 117% and recorded a public deficit of 14% of GDP last year. This compares to a deficit of 4% of GDP for Hungary.[2]
Hungary currently needs to repay or refinance debts totaling about US$4 billion by October 2010. The country has access to about €5 billion from the International Monetary Fund (IMF) as well as a surplus current account and US$41 billion in foreign exchange reserves.[3]
Moreover, the current government has been able to stabilize state finances under the IMF program. As a result of drastic spending cuts and higher taxes, the Hungarian government has been about to meet IMF guidelines, and successfully completed its fifth review in March 2010, leading to continuing financial support. Hungary’s budget deficit fell from 9% of GDP in 2006 to 4% last year.[4] Additionally, the domestic banking sector appears to be in good standing, which should further support the economy. Also, signs of a slow recovery, supported by higher exports to Western Europe and a positive current account balance, have become evident.
