Conflicts within MSZP consolidate the Hungarian PM's position




2010 budget

  • The break-up of the Budapest MSZP-SZDSZ coalition will not have a tangible effect on the passage of the 2010 budget. SZDSZ factions in Parliament and the City Council belong to different power centres, i.e., a majority of the SZDSZ faction in Parliament is expected to support the 2010 budget. There is no likelihood of an early municipality election as the relevant act requires a two-thirds parliamentary majority.
  • The government is committed to leading the country into the ERM II exchange rate mechanism before the change of government. This scenario would strengthen the professional and political recognition of Gordon Bajnai (planning to return to politics at a later date) and simultaneously limit the scope for action of the next administration,  presumably led by Fidesz that has consistently called for looser deficit targets, fiscal expansion and the postponement of the EU accession (Fidesz has already indicated: in the case it wins the next election it will submit a supplementary budget and lobby international organizations (IMF and EU) for a higher budget deficit). However, the success of this move is doubtful, as the decision-makers in the EU are afraid of Hungary’s entering to the ERM II system if the next government’s commitment is uncertain.
  • The government aims to submit a strict 2010 budget despite some “softening” items (e.g., reduced VAT for distant heating, reversal on reducing funds for child feeding programs and more funds allocated for hospitals). However, additional expenses cut deeply into budget reserves threaten the realization of budget deficit targets.
  • During the budget debate the opposition submitted over 1000 amendments to the budget bill. On the one hand with this they demonstrate their constructive approach, but on the other that the budget is completely unacceptable. At the same time, they may also dash hopes for the early passage of the budget by the planned November deadline, thereby undermining the image of an efficient and agile government. The submitted amendments focus primarily on areas (healthcare, highway repairs and municipality funds) where the government cannot give an inch without automatically softening the deficit target “carved in stone”.
  • Due to the austerity measures there could be sporadic strikes and demonstrations in the coming months. At the same time, the strikes will remain localised and are likely to focus on community transport (and within that, the major victim of budget cuts, the state-owned railway company).


Conflicts on the left

  • Conflicts within the Socialist party show no sign of abating and the December PM-candidate nomination is not expected to bring a resolution either. Major power centres within the party are preparing for certain defeat at next year's general election, i.e., the current struggle is mainly focused on key positions in the period following 2010.
  • In this context the 2010 PM candidacy is seen as a “kamikaze” mission; presumably the person selected for the position will not come from the major power centres. However, it cannot be ruled out that due to a balance of power the socialists will not be able to agree on a compromise PM candidate and, as a last resort, they will delegate someone from outside the party.
  • To date, top Budapest politicians appear to be the biggest losers of the conflict: former deputy-mayor Miklós Hagyó (a young, extremely influential MSZP politician with significant financial resources) suffered a spectacular defeat at the hands of BKV president István Kocsis. In addition, information leaked during the scuffle greatly damaged MSZP's popularity (according to a recently published public opinion survey, support for MSZP in the entire electorate dropped to 10%), leading to the irrational step of escaping from the MSZP-SZDSZ coalition in the capital. The dismantling of Miklós Hagyó's power base is expected to be a process fraught with conflicts and the resulting internal tensions may aggravate the party’s paralysis in the coming period.
  • These internal conflicts may consolidate the position of Gordon Bajnai who, playing off interest groups against each other, may improve his chances in realizing his agenda. In turn, this increases the chances for passing the budget as in its current state the Socialist party is not in a position to put up a united front against any budget item.
  • Following its dramatic collapse, SZDSZ has essentially disappeared from the political arena. The party practically has no parliamentary faction, and the faction has no party, since they are not able to control each other. In a clear sign of the crisis, the other parties no longer count on SZDSZ; in the only realistic scenario, some of its politicians may make it on the list of MSZP, or try to get into MDF.


“Communalisation” in Pécs?

  • The decision of the Fidesz-led municipal government to unilaterally terminate a contract with French Suez Environnement, minority owner of the municipal water works in Pécs (Baranya county)  raises political risks:
    • It is evident that the goal promoted by Fidesz, reviewing suspicious privatisation transactions, is not just a slogan; in some instances some politicians of Fidesz tries to curry favour with voters through extremely onerous (even illegal) measures affecting investors. The decision has met public approval as city leaders promised to cut water utility rates.
    • If the city government manages to settle the case with relatively little financial loss (to be decided in a law suit) the case may set a precedent for future Fidesz policy.


Early campaign-start from Jobbik


  • The further consolidation of Jobbik is all but certain. It could easily receive at least 15% of the votes in the next general election. There is intense competition between Fidesz and Jobbik for radical voters, for instance in respect to “taking to account” and the rhetoric based on prejudice. In this context, Fidesz’s hesitation to get rid of MP Oszkár Molnár (the mayor of Edelény, a city in Borsod-Abaúj-Zemplén county) who lately has called attention to himself with anti-Roma, anti-Semitic and homophobe statement is explicable. Oszkár Molnár’s statements drove Fidesz into an extremely uncomfortable political situation where they can lose voters both with defending their politician and excluding him. Orbán is trying to distance himself from the statements, but the politician inside the party can induce harsh criticism even on the international level,  while with disposing of him Fidesz can give Jobbik a popular politician in the county where the rate of Roma population is high and the far-right party has the strongest positions.
  • In the coming period the communication of Jobbik will focus on two issues: (1) prove its governing competence: the party must demonstrate that it is a serious political force here to stay. (2) the equal rejection of the two major parties: increasingly, Jobbik aims to attract voters disappointed with the current political elite, i.e., gradually it tries to develop a clear distance from Fidesz as well. Consequently, in the coming period clashes between the moderate and more radical right will become more pronounced.
  • In the short term this poses a risk for the two major parties: with rising tension, Fidesz risks losing the right fringe of its camp if it moves to the centre during the campaign, while MSZP, due to the intensifying Fidesz-Jobbik rivalry, will find it difficult to point to the close relationship between the two right-wing parties.




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.






Key points to watch: calendar for the next weeks


Economic events


19.10. International reserves – foreign currency liquidity (NBH, september 2009.)
20.10. Number of employees and earnings in the national economy (KSH, jan.-aug. 2009)
22.10. Retail sales (KSH, august 2009.)
28.10. Statistical report (KSH, august 2009.)
30.10. Employment and unemployment (KSH, jul.-sep. 2009.)
30.10. Aggregated balance sheet of credit institutions (NBH, september 2009.)
30.10. Household and non-financial corporations sector interest rates (NBH, september 2009.)
30.10. Balance sheet of investment funds (NBH, september 2009.)
30.10. Industrial producer prices (KSH, september 2009.)
30.10. External trade (KSH, jan.-aug. 2009)
02.11. Securities issues statistics (NBH, september 2009.)
05.11. Balance sheet of insurance companies (NBH, Q3 2009.)
05.11. Benchmark yields on government debt securities (NBH, october 2009.)
05.11. Average yields of government securities at auctions (NBH, october 2009.)
05.11. The Budapest Stock Index (NBH, october 2009.)
05.11. Preliminary data about the change in the industrial output (KSH, september 2009.)
06.11. International reserves (NBH, october 2009.)
06.11. External trade (KSH, jan.-sep. 2009, preliminary)
11.11. Consumer prices (KSH, october 2009.)
12.11. Statistical balance sheet (NBH, october 2009., preliminary)
12.11. Agricultural prices (KSH, jan.-sep. 2009.)
13.11. Gross Domestic Product (KSH, Q3 2009, preliminary)
13.11. Industry (KSH, september 2009.)



Political events


19.10. The comprehensive debate of the 2010 budget in Parliament
19.10. Demonstration of firemen against 2010 budget
19.10. Gordon Bajnai’s negotiations with Nicolas Sarkozy
07.11. Demonstration of the Democratic Trade Union of Teachers against the austerity measures of the government
22.11. Interim mayor election in Józsefváros (Budapest VIII, district)
30.11. Expected vote of the parliament on the 2010 budget
09.12. The mandate of Árpád Kovács, president of  State Audit
Office of Hungary expires




Leading Trends


Political risks and diplomatic tensions following the decision in Pécs

The decision of the Fidesz-led Pécs municipal government to unilaterally terminate a contract with French Suez Environnement, former minority owner of the municipal water works in some ways fits Fidesz’ policy to perfection. Pécs has become a sort of “pilot” for Fidesz, where the party can test the fallout of specific policy moves. The city government in place in the past six months executes its “reckoning” campaign aimed at the MSZP through dramatic changes provoked at the utility company, usually justified by reference to corruption charges. The cancellation of contract with the French-owned operator corresponds to Fidesz’ anti-privatization rhetoric. At the same time, the current case goes beyond the practices pursued by Fidesz-controlled municipalities as far as in this instance the city leadership deliberately resorted to illegal means when it took control of the company and seized its assets. City leaders justified breaking the contract by high water utility rates and alleged improper management, and filed charges against the company claiming fraudulent misuse of funds. The case has generated diplomatic tension: France’s ambassador in Budapest expressed his outrage over the decision. The company has sued the local government for break of contract, and the case could cost the city some HUF 5 billion.

Break-up of the coalition in Budapest

Based on the October 13 decision of the party’s presidency and the Budapest organization, the Socialist party abandoned the 15-year coalition between MSZP and SZDSZ and recalled its two deputy mayors (Miklós Hagyó, roundly beaten by István Kocsis in the severance-pay scandal at BKV, and Csaba Horváth, MSZP’s potential mayoral candidate in 2010). The break-up of the coalition in Budapest has nationwide implications; involving similar conflicts, the same scenario is unfolding as during the break-up of the government coalition a few months ago (which brought no benefit to either party). Leaving the coalition in Budapest may prove a misguided step, as some groups within the Socialist party. With “surrendering” the capital MSZP loses significant amounts in funding, while both SZDSZ and Fidesz (expected to cooperate in the capital) have a vested interest in pointing the finger at MSZP. While cooperation between MSZP and SZDSZ is not in danger before the budget vote, by now the BKV-case may easily become a symbol of uncontrolled and inscrutable political games, repulsive in the eyes of the electorate. Conceivably, the scandals could have been managed through cooperation and the Socialists could have projected the image of effective crisis managers in the capital as well, but following recent developments MSZP will have a hard time to promote a successful politician as its next mayoral candidate. As none of the parties, including Fidesz, have an interest in paralyzing Budapest and start an early campaign before the 2010 spring parliamentary elections, the dissolution of the assembly can all but be ruled out. While Fidesz submitted a legislative amendment that would allow an early municipal election, they also know the proposal is unlikely to receive the required two-thirds majority vote in Parliament.

Hungary could delegate László Andor as its next EU commissioner

Last week MSZP has published its list of possible EU commissioners: 1) János Veres, Gyurcsány’s former finance minister, 2) Edit Herczog, EP-member, 3) László Andor, member of EBRD's Board, 4) László Kovács EU commissioner of tax affairs, 5) Ágnes Vadai socialist politician, state secretary of the Ministry of defence.  It’s very likely that the PM will nominate László Andor. The economist is expected to be given the post responsible for regional policy. Mr. Andor appears to be an ideal candidate from the point of Gordon Bajnai: (1) in contrast to others, László Andor is clearly seen as an independent, maintaining some distance from party politics. With this choice Mr. Bajnai can follow his past nominating policy and selected a professional to an important position. He has reinforced the image of a technocrat government and made things more difficult for Fidesz, which will have a hard time to find a hold on László Andor then would be the case had he nominated a leading Socialist politician. (2) László Andor has solid ties to the Socialist party and is strongly committed the leftist causes; he also cultivates good relationship with a number of important interest groups within MSZP: In the past he was a member of Ferenc Gyurcsány's consulting body, the vice president of the economic forum established by Imre Szekeres, and even supported Katalin Szili's candidacy for the presidency. In other words, Mr. Bajnai managed to nominate a professional to the post without generating a major conflict within the party. László Andor's undisputed international reputation may help to secure an important portfolio, although his leftist sympathies may work against him in the Commission and the European Parliament dominated by a right-wing majority.

Jobbik: early campaign-start

Jobbik positions itself against all parliamentary parties; its major appeal continues to be its novelty factor in relation to other parliamentary parties, its dynamism, its call for law and order and its anti-Roma propaganda. In the past two years Jobbik established more local organizations than any other party and it has already started its nationwide campaign; its leading politicians often hold 2-3 community forums a day. At the same time, Jobbik has a number of undisguised yet less visible political goals. For instance, Jobbik's energy policy clearly serves the interests of Russia, e.g., the party’s EP-representatives (primarily Zoltán Balczó) have spoken against the Nabucco-project. As in the Ferencváros by-election and the EU parliamentary election, Jobbik is expected to start its 2010 election campaign ahead of all the other parties. Therefore, the party may nominate its PM candidate and announce its party platform in the near future.



Declining inflationary pressure, more breathing space for monetary policy-makers

As in previous months, inflation in September remained well below earlier expectations: year-two-year prices increased by 4.9%, while compared to August prices actually fell by 0.1%. This is mainly explained by the fact that due to a dramatic drop in domestic demand retailers are unable to pass on excise tax and VAT increases to consumers. This means there is no significant inflationary pressure in Hungary, which improves the Central Bank’s scope for action: according to analysts, by the end of the year the base rate may drop to as low as 6% and the rate cutting cycle could continue into 2010. With the series of rate cuts political pressure on the National Bank of Hungary has decreased; earlier both MSZP and Fidesz representatives attacked the Central Bank for the high base rate.

MNB: under heavy criticism for its proposed measures aimed at stabilising the credit market

The chairman of the National Bank of Hungary (MNB), András Simor, unexpectedly announced last week that the Bank would propose tighter government regulation of the credit market: the central bank would maximize loan payments at a lower percentage of income. The central bank’s proposal apparently came as a surprise for market players and since the announcement it came under heavy criticism from professionals, the government and the market alike. Most of the criticism is aimed at the severity of the proposal: restrictions on this scale would shut out a large percentage of consumers from the credit market and, thereby, slow the recovery from the current crisis. Moreover, as tax evasion is rampant in Hungary, the income serving as the basis for credit is but a fraction of households’ real income. The proposal would be the hardest on consumers whose income is derived in part through illegal sources. Many also question the timing of the proposal: due to the crisis borrowing is at a record low already and banks pursue a much more conservative policy than in the past, i.e., in the current situation government restrictions would further “strangle” the credit market.
The final decision rests with the Finance Ministry and eventually Parliament. Finance Minister, Péter Oszkó said: although the proposal is valid, its time has not come. However, according to the finance minister, the details will be discussed and it is conceivable that some components of the proposal will be approved by the government in the current term.

Slowing industrial output

While at a slower pace, industrial output declined again in August: on a year-to-year basis production fell by close to 20 percent, and dropped by 0.7 percent even compared to July. This is all the more alarming as lately the German economy has shown signs of recovery yet, according to recent data, for all practical purposes it has had no trickle-down effect in Hungary. With all that, one can expect to see positive developments in the last quarter thanks in part to rising orders form Germany and in part to last year's low base.



Budget developments


The general debate on the budget has got under way in Parliament. The 2010 budget bill is considered conservative; the Finance Ministry based its calculations mainly on worst-case scenarios, i.e., for next year it projects a recession of close to 1 percent, the stagnation of unemployment figures at a high level and rising public debt. In addition, the budget bill includes a HUF 79 billion stabilisation reserve, HUF 57.3 billion in general reserve and HUF 50 billion in interest-rate risk reserve. The government managed to settle conflicts that appeared to intensify in the past few weeks, i.e., funds for child feeding will not be cut, the government also managed to come to an agreement with hospitals at the expense of the 2010 budget, and the VAT for distant heating, an issue promoted by the socialists, will also be reduced. These compromises demonstrate that the government managed to keep the lid on the budget debate, although as result of its concessions the budget reserves may be significantly depleted.