Huge Opposition Victory in Pécs, Hungary

Prognosis

 

Pécs mayoral election – political fallout

 

• The defeat in Pécs that shocked the party will disorient some MSZP politicians and calls for the “social compensations” of the government’s program may intensify and put pressure on the government’s budget deficit target.
• Divisions will become apparent among socialists who have been solidly behind the government so far. But the division will further reduce the party’s chances of addressing its potential voters in the campaign.
• The Bajnai government survived a short but intensive crisis on Thursday. A group of influential MPs discontent with the government’s property tax plans planned a putsch against the finance minister, but after a series of urgent meetings the minister and the faction forged a compromise that would satisfy both the party and the central budget.
• The outcome may intensify the tensions between Katalin Szili and her party, as suggested by her earlier statements where Szili blamed the party in advance for the debacle.
• Political Capital expects heavy infightings in the MSZP after 7th June that may result in the party’s falling apart. Some of the Socialist politicians will turn left and create an ideologically more leftist party while others will seek for career in other or completely new parties.
• Thus Political Capital expects a political earthquake in Hungary after the EU elections. It cannot be ruled out that leading politicians from SZDSZ like Gábor Demszky, mayor of Budapest or János Kóka, faction leader quits the liberal party if it is unsuccessful in the EP election and joins forces with deserting Socialists or even with MDF.

EP campaign – entering the home stretch

 

• The two major parties’ EP Parliamentary campaign strategies are diametrically opposed: in the final phase of the campaign Fidesz will continue to stress the importance of the election in its effort to generate a high turnout and, as throughout the past few years, its objective is to ouster the current administration; in its communication the relevance of the ballot is limited exclusively to domestic issues.
• In contrast, MSZP is already preparing for defeat, it plays for a low turnout and places more emphasis on EU issues, thereby minimising the relevance of the election well in advance. However,the strategy may result in an even larger-than-expected defeat; low turnout in the 2008 referendum meant that MSZP voters stayed home while supporters of the opposition voted in large numbers.
• SZDSZ builds its campaign on a single theme – taking a stance against extremists,thereby developing a distance from the Bajnai-government.
• The socialist and liberal (and in part Fidesz) campaigns against Jobbik only boosts the radical party’s domestic political position and improves its chances at the June election.
• While Fidesz has nothing to gain if Jobbik wins an EP seat, based on the outcome of the Pécs election it does not have to reckon with MSZP as a serious rival. In that light it is even more likely that in the EP-campaign Fidesz will focus on eliminating Jobbik from the race. To this end, the party will resort to the following two tactics: intense mobilisation (a high turnout undermines the chances of Jobbik with a small but highly motivated support base) and co-option Jobbik’s topics (e.g., public security).
• As in the past, MDF builds its campaign on generating popular discontent with the two major parties; the success of the tactic depends on how effectively it can position Lajos Bokros and promote economic policies distinct from that of the government and MSZP. Besides, the public debates over the exclusion of three MPs from the party (Zoltán Hock, Kálmán Katona, András Pettkó) significantly deteriorate MDF’s chances to delegate members to the EP.

Economic policy – a return of confidence?

 

• At this point no factors appear to lead to the substantial depreciation of the forint; there is a good chance that the domestic tender will stabilise around the current EUR/HUF 270-300 exchange rate. However, a new global panic (a distinct possibility) could send the forint rate reeling again.
• Easing IMF loan conditions (especially the budget deficit target) may bring obvious advantages for the government and MSZP for two reasons: 1) it can be communicated as a sign of returned confidence in Hungary, 2) the government will possibly have additional HUF 1000 billion (EUR 3.5 billion) to spend in 2009 and 2010; during the campaign it can be more generous and implement popular measures (e.g. more radical tax cuts).
• The socialists will try to present the strong forint as the achievement of recent crisis management measures, although a strong exchange rate cuts both ways. By reducing FX loan payments it has a direct impact on many households, making the austerity measures more bearable. On the other hand, a stable and strong exchange rate lifts the atmosphere of panic, increasing resistance to the government program.
• It is to be seen which of the opposing trends carries more weight in shaping the impression of Hungary, determining the mood of global investors: government measures aimed at returning the economy to a sustainable growth path or the political instability generated by the same austerity measures.
• If the forint exchange rate stabilises at a lower level, the National Bank of Hungary may return to rate cutting in the foreseeable future.

 

Key points to watch

 

Economic events

 

 

Political events

 

 

 

Leading Trends

 

Pécs mayoral election

 

Belying preliminary expectations of a minor defeat, Katalin Szili suffered a major setback in the interim mayoral election in the city of Pécs. Compared to other interim elections, at a not particularly low turnout MSZP’s most popular politician received barely one third of the votes even as the sitting Speaker of the House was backed by, among other organisations, MDF and SZDSZ. In comparison to the history of earlier elections in Pécs, the current interim mayoral balloting ended in an overwhelming victory for Fidesz. The outcome is a clear demonstration that the national political mood left a strong mark on the local election. The outcome is expected to have a major effect on political developments. Relative to the weight of the post, the socialists invested a lot of effort in the campaign, considering it as an opportunity for a “breakthrough”: Pécs is one of the oldest and most solid MSZP “fortresses” in the country and the loss of the city increases the odds that in 2010 Fidesz will sweep the majority of individual districts and win a two-thirds majority in Parliament. Consequently, the shocking defeat may trigger more severe MSZP reactions than recent public opinion surveys showing record low support for the party.

 

The winner, Zsolt Páva, will have the chance to manage the city until the next local government election in the autumn of 2010. In the remaining 18 months his performance will be defined by three factors: (1) the city’s debt rises at an alarming rate and today it struggles to maintain daily operations; (2) in 2010 the city will act as the European Cultural Capital, although the announced investment projects are not expected to be concluded on schedule, i.e., the new mayor will have to save the city and the country from total embarrassment, leaving him in a “damage control” position; (3) in the city council Zsolt Páva will have to cooperate with a socialist majority; with their coalition intact, MSZP and SZDSZ control minimum 21 votes in a 40-member council.

 

 

 

The consolidation of Fidesz

 

Fidesz not only managed to win the Pécs election, but based on recent public opinion surveys it also attracted additional undecided voters. In the total population support for the party increased by 1 to 6 percentage points. Among voters with clear party preferences, the party enjoys a huge lead, with its average support exceeding 67 percent. This indicates that in the last month in the run-up to the EP election Fidesz sympathisers are highly active.

 

Though Political Capital is sceptical about opinion polls publishede in political media it seems that so far SZDSZ and MDF have failed to mobilise their voters. In the last phase of the EP election campaign their support base stands around 2 percent and that rate is not significantly higher even among decided voters. It appears that even after acting as the referee in the “early election vs. Bajnai government” title match SZDSZ failed to attract additional support. And so far MDF failed to turn its communication victory (thanks to Lajos Bokros’ nomination to head its EP list) into tangible support.

 

 

Forint appreciation

 

In the past few weeks the forint made strong gains against the euro, developing a safe distance from an earlier EUR/HUF rate of over 300. Three factors may have played important roles in the exchange rate change, each contributing by different degrees.

 

1. The major factor was that in recent days global investor confidence has started to return, panic is subsiding, there is a growing willingness to assume risk, share indices are rising and confidence in regional currencies is gradually returning.
2. Based on latest data, the country’s foreign trade balance improved substantially in March: while exports fell sharply due to a drop in foreign orders, a drop in domestic demand and the weak forint (good for exports) led to a much steeper decline in imports. As a result, the foreign trade balance returned to positive territory, further boosting investor confidence in the country and concurrently, compared to other regional currencies, the forint managed to improve significantly.
3. Last week Parliament passed the bill eliminating 13th-month pension benefits: presumably, investors are starting to take seriously the Bajnai-government’s corrective measures, helping to rebuild confidence in the country.

 

Of the three factors the latter has the least impact on the resurgence of the forint, as in the current situation the exchange rate is determined primarily by global trends. Therefore, opposing political camps assume significant risk when they place the domestic currency’s exchange rate in the centre of their communication: earlier Fidesz blamed the government and the Central Bank for a weak forint, and recently Gordon Bajnai made several statements to the effect that the resurgent forint demonstrates the effectiveness of government policies.

 

 

 

IMF-loan

 

Since the inauguration of the new administration, the future of the joint IMF-EU-World Bank loan has taken centre stage for two reasons: it remains to be seen whether the country will need additional credit in 2010 and could terms of the current loan, today seen as already overly excessive on several counts, be eased. In respect to the first issue, since its inception the government has insisted there will be no need for further assistance; by the middle of next year it will manage to consolidate Hungarian public financing to a degree where the country will be in a position to finance its operation with loans from the open market. From their point the argument makes sense as the issue poses a problem only in the medium range, although the country could find itself in deep trouble early next year if negotiations for a new loan have to be started in the middle of the election campaign. The majority of economists maintain that the extension of the IMF loan will be inevitable. As they point out, while Hungarian government securities are one of the best investment opportunities, there is no demand for the instrument. And since today, instead of the interest rate, confidence is of primary importance, it is highly unlikely that one year from now investors will wish to finance the Hungarian deficit.

 

In respect to renegotiating terms of the current loan agreement members of the Bajnai-government no longer represent such uncompromising positions, and both the prime minister and the finance minister said that restoring confidence was of top priority. But, according to some unofficial information, IMF and EU will loosen the conditions in fiscal targets, to almost 4% in 2009 and almost 5% in 2010. It is all but certain that as long as the current government remains in place the country will deviate from the original loan terms only with the consent of international bodies.

 

 

The consolidation of Jobbik

 

According to public opinion surveys, since the end of 2008 Jobbik has left a solid mark on pollsters’ radar screens.

 

Based on recent surveys, in the total population Jobbik has a 2-3 percent support base, while in respect to dedicated voters with clear party preferences Medián, Szonda-Ipsos and Tárki measured 4% and Századvég-Forsense 5% support. The results of interim elections show similar levels of support for the party. While based on the results of interim elections (parliamentary or mayoral elections) one should be careful making sweeping conclusions concerning general elections (be that national or EP parliamentary elections), aggregate interim-election results in 2009 show that typically Jobbik can take 2-2.5% of the electorate to the polling both. Thanks to generally low turnouts this has given the party a share of 4.5 – 8% of the total votes cast. In general, research and the results of interim elections show that while radical voters are rather active, Jobbik’s performance at the upcoming EP elections depends mainly on election turnout.

 

 

However, in itself none of this explains why today the general public looks at Jobbik as a significant political force. To reach this point other political parties had to treat the radical party as a force to be reckoned with. While coming from different positions and using different arguments, today all parties consider Jobbik’s “rise” as a major challenge. MSZP and SZDSZ try to mobilise their camps against the “far-right threat” and Fidesz tries to eliminate Jobbik from the race in order to hold on to its own radical supporters and defend its strategy aimed at unifying the right. In the public mind all this attention lends undue relevance to Jobbik. Moreover, in the political arena that underwent radically change since the last major election campaign, the current poor showing of small parliamentary parties leaves Jobbik in a relatively strong position and, thanks to the low support for SZDSZ and MDF, the radical party is the odds on favourite of becoming the “third force”.

 

 

Parliamentary approval for the first instalment of the Bajnai-package

 

The first phase of the Bajnai-cabinet’s program received a solid majority in Parliament. The tax amendment bill was passed by 201 delegates, all MSZP representatives (with the exception of the mayor of Székesfehérvár, Tihamér Warvasovszky) the SZDSZ faction, as well as two MDF representatives (Ibolya Dávid and Károly Herényi) and one independent representative (Antal Császár), although the latter three withheld their support for measures affecting welfare programs. After accepting these measures, a harsh debate over the introduction of the real estate tax has raised between the government and socialist MPs. On Thursday morning it seemed that the debate would lead to the fall of the government and early elections, but the PM called for urgent meetings and finally the party representatives and the government forged a compromise.

 

 

Approved reform measures:

 

• As of July 1, employer contributions are reduced by 5 percent, up to twice the minimum wage amount.
• Retroactive from January 1, 2009, the lowest income-tax bracket is moved from HUF 1.7 million to HUF 1.9 million.
• After a 2-year legal entitlement for coverage, sick-pay is reduced from current 70 to 60 percent of the average wage.
• Sick leave (a benefit for 15-day absence due to illness) is reduced from current 80 to 70 percent of the annual income.
• As of July 1, the VAT increases from 20 to 25 percent, while simultaneously a special 18 percent VAT for dairy products, baked goods and distant heating goes into effect.
• Excise tax on tobacco, alcohol and fuel is increased by 5 percent.
• Between 2012 and 2018 the retirement age is increased from 62 to 65.
• Rules for old-age pension are restricted.
• At a GDP growth under 3 percent pension benefits increase at the rate of inflation, in the case of higher growth a rise in real wages is given more weight in indexing.
• The 13th-month pension is eliminated; in the future, with economic growth exceeding 3.5 percent and adherence to the deficit target, pensioners are entitled to a premium (its size tied to the performance of the economy).