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 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)