2010 budget passage is all but certain in Hungary

Prognosis

 

The budget and government stability

 

• In light of key figures the 2010 budget is not going to fall prey to the upcoming election campaign; it is a tough austerity budget proposing to cut spending to the tune of HUF 400 billion (EUR 1.5 billion).
• This and the government’s “de jure” minority status again raise the question “whether Parliament will pass the budget bill”?

• Currently the passage of the budget bill is all but certain; there is only a minimal chance for the fall of government and an early election:

1. MSZP and Gordon Bajnai are mutually dependent on each other: the early voluntary or forced resignation of the government would for both parties abolish the sole political achievement of the past few months, i.e., crisis management and economic stabilization.
2. The Socialists are already resigned to defeat in the next election; the majority does not expect to be re-elected to Parliament. Under these circumstances steps in the direction of an early election would go against representatives’ vested interests.
3. Within SZDSZ it is highly unlikely that the party led by Mr. Retkes could take control of the faction. The majority of SZDSZ faction members (convinced of losing their Parliamentary seats in the upcoming election) is bent on serving the full term and thus is expected to support the government.
4. Aside from MSZP’s 188 active representatives and the three independent representatives regularly voting with MSZP (Zoltán Lengyel, István Gyenesei and Antal Császár) the faction needs but three ‘yea’ votes to pass the bill. Taking the support of most SZDSZ-faction members for granted, despite a few MSZP representatives going against their party, MSZP is expected to easily guarantee a majority.

• From the point of the budget the following factors may lead to changes during the parliamentary session:

1. MSZP has 31 parliamentary representatives who are also mayors. If the debate between the government and the municipalities over spending cuts continues to deepen, some mayors (already preparing for the 2010 local elections) may go against the parliamentary majority decision.
2. Intensifying infighting within MSZP, exacerbated by recent corruption scandals at BKV (Budapest Transit Authority) may even split the party.
3. If Gordon Bajnai comes to the conclusion he has no chance to implement additional crisis management measures and the Socialists would soften his program to an unacceptable degree, he could resign before April 2010.

• In response to the budget cuts social turbulences is expected in some areas. In this context the ongoing debate with local governments, expected financing problems and potential closing of institutions are the most crucial issues.

• Community transport is another area holding difficulties for government: both railroad and bus drivers unions, concerned about layoffs, threaten to strike. At the same time, widespread civil protests and strikes paralyzing the entire country are not in the forecast.

 

 

The Slovak/Hungarian conflict

 

• If, while being the victim, Hungary manages to appear in the conflict as the conciliatory party, it may improve its diplomatic standing. At the same time, despite outside pressure, one should not over-rate the opinions of Western countries in this issue; it is all too clear that the EU refrains from “acting as a referee”, i.e., the solution is left to the two involved countries.

• In the coming months the current conflict will be a central topic in election campaigns in both countries. In the coming period no breakthrough is expected in the diplomatic relations. Both countries will hold general elections in 2010 and apparently there are political forces on both sides (in Slovakia the Slovak National Party and Smer, trying to win over its voters, and in Hungary primarily Jobbik) that hope to rally more support by stoking the flames of conflict. Consequently, the campaign will represent an increased risk for both countries even as, by all appearances, both sides try to prove their readiness for compromise.

• The aggravation of the Slovak/Hungarian dispute and the deterioration of their diplomatic relationship could have grave consequences on commercial/tourist contacts between the two countries and lead to the postponement of joint infrastructural and economic investment projects.

 

 

Internal struggle in BKV and MSZP

 

• The scandal involving severance pay and bonuses for BKV managers eventually undermine MSZP, as the company’s top manager and former chief executive officer of MVM (Hungarian Electric Company) István Kocsis and his supporter, Fidesz, managed to shift political responsibility to the Socialists and socialist deputy-mayor, Miklós Hagyó, who lost the political control over BKV.

• Within the party itself major forces were mobilized for weakening the position of Miklós Hagyó, once a powerful party politician with considerable financial resources. This may intensify internal struggle within the Socialist party and it cannot be ruled out that as a result further corruption scandals within the party will come to light (and not only in the Budapest organization).

• Permanent corruption scandals and intensifying infighting further undermine MSZP's chances for addressing voters and improving support for the party in the coming period.

• The prime ministerial nomination (expected in December) may lead to further conflicts in the party. As, for all practical purposes, the Socialist party is all but resigned to defeat, apparently no major politician is eager to seek nomination. The nomination of Gordon Bajnai would benefit the party primary as a way to freeze internal conflicts and minimize losses at the election. As defeat is seen as a foregone conclusion and Bajnai has nothing to gain from running, he rejected the nomination. His current political moves are clearly efforts to build the foundation for a future return to politics, but not to be the candidate for PM in 2010.

 

 

IMF-loan and budget outlook

 

• An improved macroeconomic environment, slowly returning investor confidence in the country and the resulting rising demand for Hungarian government securities offered the government the opportunity to reschedule the IMF loan, thanks to which the next administration will have the chance to draw on the last instalments.

• By rescheduling the debt the government has apparently left Fidesz in a difficult position. The opposition party (while frequently criticizing the IMF) was clearly planning to apply for a new loan to finance in part a fiscal expansion program to stimulate the economy. However, as a growing number of experts outside the government emphasize that there is no need for new loans and the next administration will be unable to claim that the Bajnai-government had spent every penny of the IMF loan, Fidesz would be hard put to justify an application for new loans.

• The improved macro economic environment may also have a beneficial effect on the budget, although meeting the 2010 deficit target remains questionable and, according to many observers, it could only be met with the implementation of further austerity measures. There are still no signs for measures aimed at loosing the budget. If, following next year’s general election, the Hungarian economy takes a significantly different course then projected at the time the budget was passed, the need for a supplementary budget could be increased.

 

 

 

 

Key points to watch: Economic and political calendar

 

 

Political events in the coming months

 

 

 

Economic events and data releases in the coming month

 

 

 

 

 

 

Analysts consensus

 

Political Capital analyst consensus: one-month, short term forecast (with change over to the previous month in parenthesis):

 

 

Methodology: Each month analysts of Political Capital provide estimations on the political events of the upcoming month in a 10-grade scale.

 

 

 

 

 

Leading Trends

 

 

The effect of the BKV scandals on the internal balance of power within MSZP

 

In the past few weeks there have been a number of reports of scandals related to wasteful management at the Budapest Transport Authority (BKV). The political fallout has a negative impact on the governing party's national standing and appears to reshuffle the party’s internal balance of power.

 

The series of scandals have shaken to the core the MSZP-SZDSZ coalition in the Budapest City Council enjoying a majority of one and, when after a lengthy debate supervision of BKV was transferred from one socialist deputy mayor (Miklós Hagyó) to the other (Csaba Horváth), a split has been averted. The two coalition faction heads have assured the deputy mayor of their full support, and MSZP tries to minimize its political losses by promoting one of its politicians untainted by corruption scandals and plans for reorganization.

 

Although BKV Zrt. Chief executive officer, István Kocsis, launched an internal investigation to be concluded by September 30, Mr. Horváth has also promised to conduct an audit of all consulting/management contracts and severance payments, as well as putting the company's operation on track before the end of the year. As the company has difficulties receiving credit on the market, to maintain operations BKV will have to apply for funds from the government. For the time being Gordon Bajnai has expressed his reservations related to wasteful practices at the company. At the same time, the transport authority is expected to receive the needed funds; should that be rejected, MSZP, Budapest Mayor Gábor Demszky and Fidesz may blame the government for BKV's operating failures (“the government is punishing the citizens of Budapest”).

 

The scandals at BKV have undermined the position of Miklós Hagyó, a politicians with a meteoric rise in the party, so much so that internal opposition within MSZP is urging the rethinking of the party's 2010 Budapest electoral lists approved by the party before the EP elections (on the list Hagyó and Horváth occupy third and fourth positions). The series of scandals at BKV have dominated public discourse in the past few weeks, further deteriorating MSZP's national standing, and even relatively successful economic stabilization measures are unable to offset these unfavourable developments.

 

 

MSZP: nomination of the prime minister in December

 

The electoral board of MSZP, the major governing party, announced that its next conference will be held on December 12, 2009 with the agenda of nominating the party's next prime ministerial candidate. Although many party members support the nomination of current Prime Minister, Gordon Bajnai, who replaced Ferenc Gyurcsány this April, he is unlikely to accept the nomination. At his swearing-in ceremony Mr. Bajnai made it clear that he agreed to lead the so-called crisis management government for a single year and political logic does not dictate that he would change his mind. The largest opposition party, Fidesz-MPSZ leads the socialists in the polls by a two-thirds majority (aside from public opinion surveys, its lead was demonstrated at the June EP election as well) and an exhausted Socialist party is unlikely to make up its handicap in six months. Not a member of MSZP, the Prime Minister is not expected to run the risk of a guaranteed defeat. If he has long-term political ambitions, it seems more logical that he remain in the background in 2010. Consequently, the Socialist party, beset by a series of internal conflicts, is likely to have a hard time finding a suitable candidate ready to accept this unattractive role and receive the firm support of a fragmented party. In this situation two options appear to be available: 1) a strong party politician accepts the role “as a sacrifice to the party” (although this may carry a huge risk); 2) MSZP can find someone outside the party or a candidate with no political clout.

 

 

 

Improving macro environment and prognosis

 

The Hungarian economy declined by 0.1 percentage point less than projected by KSH (National Statistical Office) and Ecostat in their August flash reports: on an annual basis the Hungarian GDP shrank by 7.5 percent and, adjusted for calendar effects by 7.4%. Based on seasonally adjusted data, compared to the previous quarter, economic output declined by 2%. In July, compared to the same period one year earlier, industrial output dropped by 19.4% (in June by 18.8%).

 

In the second quarter the Hungarian economy declined steeply, while its major export markets, Germany and France, managed to turn the corner, which could have a favourable impact on the Hungarian economy already this year. Based on the recent inflation report of the National Bank of Hungary and expert opinion, the Hungarian economy has probably reached the bottom in the second quarter, i.e., on an annual basis the economic decline is expected to slow in the second half. In other words, the average 6.7% GDP drop projected for the year could be maintained.

 

According to National Bank of Hungary chairman, András Simor, the real economy in Hungary may start to grow in the second half of 2010. For this and the next year the chairman projects a 4.5 and 4.1% inflation, respectively, and in the second half of 2010 the rate may drop below the 3% target. In the period since the eruption of the crisis economic projections typically had to be corrected downward, although in the past few weeks there has been a turnaround and analysts are increasingly calculating with upside risks. This position is taken primarily by London analysts who look at the region as a whole: the consensus among these analysts, claiming that Hungary will continue to be in a recession in 2010, appears to be cracking.

 

 

 

Budget

 

The government hopes to speed the passage of next year's budget, which means that parliament may vote on the final bill at the end of November. The strategy is twofold: on the one hand, the technocrat government has to maintain the impression of constant and efficient action and, on the other hand, the chances of passing the budget is directly increased by the distance between the parliamentary voting and the election campaign.

 

The budget will be extremely spartan again: the government counts on a revenue shortfall of HUF 400 billion, i.e., spending must be reduced by that amount. Half of that will be taken from community transport (HUF 40 billion) and municipalities (HUF 120 billion), and the balance will come as a result of last year’s measures, elimination of the 13th month pension, changes in pension indexing, a wage freeze and the reform of housing subsidies, whose effects will be felt already in 2010. Along with cuts, the budget will allocate more funds in three areas: job creation, education and public security. The latter is expected to become the government’s most important symbolic and political topic in the fall season.

 

 

 

IMF-loan rescheduling

 

At the initiative of Hungary. the IMF extended the tenor of its standby loan by six months. through October 5. 2010. The need for the extension is explained by the fact that Hungary will hold general elections next spring. around the time the original deadline was to expire. The IMF loan agreement has been reviewed twice already: while earlier. in response to the deepening crisis the parties established steadily deteriorating economic indicators (in February 2009 the deficit target was increased from 2.6 to 2.9% and in May to 3.9%)  this time there was no need to adjust either the growth target (-6.7%) or the public finance deficit target.

 

The head of the IMF delegation. James Morsink. confirmed that the Hungarian economy is on the right course and next year’s 3.8% deficit target can be maintained. The head of the delegation also discussed the extension of the standby loan with the Orbán-cabinet's (1998-2002) finance minister. Mihály Varga. considered the likely candidate for the post following next year’s general election. While Fidesz did not raise objections to the agreement. the former finance minister cautioned against taking an overly optimistic view of the state of the economy. a mistake the party believes was committed in the 2006 campaign as well. Aside from criticising the government. the statement may also be a reference to the fact that this year Hungary will apply for merely EUR 55 million from the package and the balance is expected to be drawn in 2010 in four equal instalments.

 

The fact that Hungary is recovering from its crisis-induced economic woes faster than expected gives cause for optimism: the population and public financing have both adjusted to new conditions created by a crisis and continue to make savings with declining consumption. As imports declined more than exports. the foreign trade balance has shown a surplus for months. Thanks to developments pointing in one direction. starting from a low base investor confidence in Hungary may return. which could leave the country in a position to finance its sovereign debt on the market.

 

 

 

 

The region in light of macroeconomic data

 

Recent macroeconomic data present a mixed picture for the region. Compared to the previous month, in July in Romania the annual decline in retail slowed from 17.3 to 13.8%, and in industrial output from 8.9 to 6.9%. Estonia’s GDP continues to drop steeply (-16.1%), although updated data shows a slight improvement where, among total output components, export is on the rebound. Slovakia’s industrial output (-21.6%) was worse than the consensus and previous month’s data (experts asked by Reuters News Agency projected a drop of 17.4%). Compared to earlier data, the Czech economy shrank faster in the second quarter: it came to annual 5.5% (earlier estimates projected 4.9% decline) which, however, on a quarterly basis still represents a minimal, 0.1% growth. The Polish outlook is the most promising: Goldman Sachs’ London bureau increased its projection from a decline of 0.8% to growth of 1% for this year, and for next year a GDP growth from 1.3% to 2.5% .