Hungary Passes 2009 Budget Under IMF Scrutiny

The budget aims to lower the budget deficit to 2.6 percent of gross domestic product from this year`s expected 3.4 percent.

Hungary's Socialist minority government won a reprieve on Monday when parliament passed its 2009 budget, but it faces growing strike action by unions and a deepening economic downturn.

The approval of the budget has been essential for Hungary to deliver on pledges made to the International Monetary Fund and the European Union, which granted the country a $25.1 billion rescue package in October to avert financial crisis.

Prime Minister Ferenc Gyurcsany had said he would resign if the budget failed to get through parliament. His position has been strengthened, but he faces a tough year with his Socialist party lagging the opposition in polls.

The IMF-led bailout ensures that Hungary will be able to finance its large debts even if foreign investors' appetite for Hungarian assets does not improve next year.

However, the economy will slide into recession next year and unemployment is on the rise.

A wage strike by rail workers which started on Sunday severely disrupted train services. Public sector unions plan a nationwide strike in early January in protest over the government's wage cuts and spending cuts in the budget.

"The passing of the budget is Ferenc Gyurcsany's victory as he proved that the minority government is viable, and with this he has bought time," said Zoltan Kiszelly, a political analyst.

Kiszelly said strikes were unlikely to pose a threat to the government as society was divided politically and Hungarians do not tend to sympathise with those involved in labour conflicts.

An early election is now unlikely and the government is expected to stay in power until the 2010 parliamentary election.

"In June 2009, elections to the European Parliament will be a gauge of the electorate's mood, especially since these are likely to come around the trough in economic activity," Goldman Sachs said in a note.

DEFICIT CUTS

The budget aims to lower the budget deficit to 2.6 percent of gross domestic product from this year's expected 3.4 percent.

It passed as the opposition Free Democrats, who quit their coalition with the Socialists in April, opted to back the bill after the government agreed to limits on future spending.

Hungary's financial markets and currency have stabilised since the October market upheaval, but the government will have to stick to budget cuts under the watchful eyes of the IMF which reviewed the country's performance on Monday.

Hungary has drawn upon about 5 billion euros from the IMF which was put into the central bank's reserves and will also use further, mostly EU funds, for debt financing.

"Continued implementation of economic policies consistent with the programme is essential to maintain investor confidence and minimise the depth of the economic downturn," James Morsink, the head of the IMF delegation to the country said on Monday.

The economy is expected to contract by one percent next year due to a downturn in Hungary's main export markets in western Europe, and a tightening of lending conditions.

Most analysts say the deficit target is achievable, but structural reforms are needed to make budget cuts sustainable.

"On longer term, structural reforms are a must, and the emphasis should be on a comprehensive labour and tax reform. The pension system must not be a sacred cow either," said Zsolt Kondrat, analyst at MKB Bank in Budapest.