Hungary government stable but seen under pressure

BUDAPEST, Dec 2 - Hungary's minority government has cemented its position by passing key budget figures and tax laws in parliament, but its resolve to cut spending will be seriously tested as the economy slides into recession.

The Socialists staved off financial crisis in October with a $25.1 billion rescue package from the International Monetary Fund and the European Union and pledged to slash spending; but they face mounting pressure from unions who demand wage hikes.

The economy, which relies heavily on exports, has been hit by Europe's slowdown. Foreign firms have already axed thousands of jobs and more job losses are expected next year when the economy is seen contracting by one percent.

The government scored a major political victory and averted early elections when it passed the main 2009 budget numbers and tax legislation in parliament with help from some opposition MPs.

However, in the absence of public and political support, it has little hope of pressing much-needed structural reforms.

The budget is widely expected to pass in a final vote on Dec. 15 and this has strengthened the position of both the government and Prime Minister Ferenc Gyurcsany, who said he would resign if the budget is voted down.

His government is now seen staying in power until the next 2010 parliamentary elections.

"The position of the government has strengthened, it is almost certain now that the next elections will be as scheduled in 2010," said Attila Juhasz, political analyst at think tank Political Capital.

However rising unemployment, falling real wages and union protests will likely further erode the popularity of the Socialists who have lost public support since 2006 when they imposed tax hikes and made an attempt at healthcare reforms.

"As the impacts of the crisis hit the real economy, this will weaken the government politically ... although it will not threaten its stability," Juhasz said.

The next political test for Gyurcsany will be the 2009 European Parliament elections. He may not be challenged unless the Socialists lose heavily to the main right of centre opposition party Fidesz.

TOUGH YEAR AHEAD

While the IMF package has sheltered Hungary and its currency in the near term, financial markets will watch closely whether the government meets its deficit targets and sticks to the wage freeze and pension cuts it promised to the IMF.

Hungary pledged to cut its budget deficit to 2.6 percent of gross domestic product next year from 3.4 percent in 2008.

The country's debt market has still not recovered from October's crisis and foreign investors have not resumed buying Hungarian bonds, which would be essential for financing the country's large external debt in the longer term.

Analysts said a prolonged liquidity crunch and economic downturn in the euro zone could put further strain on the country's growth outlook and financing needs next year.

"In this case growth is likely to slow down further and there will be need for additional fiscal tightening," UBS analysts said in a note.

On Monday the government, in a bid to placate public sector unions which threaten strikes, said it would pay wage compensation to public sector workers next year which raised some concerns over its commitment to fiscal cuts.

There is also concern that the unpopular Socialists will be tempted to loosen spending ahead of 2010 elections.

Analysts said Hungary could face renewed market upheaval if it tried to dodge the fiscal promises made to the IMF.

"That would threathen the stability of the currency and might lead to a significant rise in government yields," said Lars Rasmussen, analyst at Danske Bank.