By Krisztina Than
BUDAPEST/WARSAW, Jan 29 (Reuters) - Hungary launched a $4.5
billion budget reshuffle on Thursday to combat the economic
crisis and data showed Polish growth slowed at end-2008 in what
some analysts said pointed to contraction for part of this year.
Ratings agency Fitch predicted the export-dependent Czech
economy would shrink by 1.5 percent in 2009 due to vanishing
demand for its products in Western Europe, but it said its
sovereign debt rating was safe due to low debt levels.
Once seen by most analysts as insulated from the global
turmoil, Central and Eastern Europe is now facing a downturn
that has prompted economists to slash growth forecasts and sent
policymakers scrambling for measures to stave off the crisis.
Preliminary data from the European Union's biggest
ex-communist state, Poland, showed gross domestic product slowed
significantly in 2008 to growth of 4.8 percent versus 2007.
Although still positive, it was a touch below forecasts for 4.9
percent growth and well under the 6.7 percent a year earlier.
Piotr Kalisz, Chief Economist at Citi's Bank Handlowy, said
the numbers indicated fourth quarter growth fell compared with
the previous three months, largely due to declining investments
and because a paucity of credit was starting to affect firms.
"Because this trend will continue at the beginning of 2009,
we can assume Poland will enter a technical recession," he said.
Polish Central Banker Miroslaw Pietrewicz on Thursday said
he was in favour of further "decisive and significant rate cuts"
following Tuesday's larger-than-expected 75 basis point cut that
brought the official borrowing rate down to 4.25 percent.
"The (data) was quite decent. But we should remember that
the situation has totally changed in the fourth quarter. I still
think growth this year will be around 1 percent, although I hope
that the 'worst case scenario' will not take place," he said.
Central banks across the region have been slashing rates
since last year's worry that price growth could spiral out of
control has been usurped by concern over sliding growth.
Poland has cut its main rate by a point and three quarters
to 4.25 percent since November. The Czechs have slashed by a
point and a quarter to 2.25 since August, and Hungary has taken
back two thirds of a 300 basis point hike in October.
The zloty <EURPLN=> was bid 0.3 percent down from
Wednesday's close at 4.372 per euro by 1041 GMT.
HUNGARY SLASHES TAXES
In Hungary, Prime Minister Ferenc Gyurcsany said his
government would reshuffle around 1 trillion forints ($4.57
billion) worth of budget items by slashing personal income tax
and employers' social contributions to boost the economy.
He said a 4 percent "solidarity" tax on corporations and the
wealthy introduced in 2006 should be eliminated. But he proposed
offsetting the revenue loss with a modest rise in the value
added tax (VAT), the elimination of some tax allowances, a
wealth tax on the richest and the reduction of social spending.
Hungary has been one of the region's hardest hit due to
heavy state spending, high household borrowing, and high
external financing. It grabbed a $25 billion IMF-European Union
lifeline in October to avert a potential financial meltdown.
It is redrawing this year's budget due to a deeper than
expected contraction in its economy which the government now
estimates at 2.5 to 3 percent, mainly because exports will slump
due to a collapse of demand in the euro zone.
"A joint and comprehensive reform of the tax, social and
employment systems is needed," Gyurcsany said. He did not
specify the exact size of tax cuts and rises planned. The
government will finalize plans next month.
Analysts hailed the measures as a step in the right
direction, but they said the economy was already under so much
pressure that not too much should be expected.
"There is certainly little room to move and these decisions
will at best only mitigate the country's recession," said Gyorgy
Barta from CIB Bank. "All this is proof to the fact that major,
thorough structural reforms should have been conducted earlier
on, when conditions were still favourable."
In Prague, Fitch director for emerging Europe sovereigns
David Heslam told Reuters the Czech economy would shrink by 1.5
percent in 2009, revised from an earlier estimate of 1.5 percent
growth, and then rebound in 2010 to expand by 1.9 percent.
"We are expecting a recession in 2009," he said. "That
reflects largely the collapse in demand from the Czech
Republic's euro area core export markets." []
Heslam said the Czech rating should not be affected by the
downturn, although the fiscal deficit is likely double to around
2.2 percent of gross domestic product in 2009, from around 1
percent last year.
Most analysts expect Czech growth to hover around zero this
year. Central bank Governor Zdenek Tuma said this week he
expected "a little" growth and the government has trimmed its
forecast to 1.4 percent, from 3.7 percent.
(Reporting by Balasz Koranyi in Budapest, Adrian Krajewski in
Warsaw, and Jason Hovet in Prague; Writing by Michael Winfrey)
