On the block

By bne IntelliNews February 25, 2010

Nicholas Watson in Prague -

Hungary typifies the tension between getting elected and making the painful spending cuts.

The country had been suffering economic problems long before the crisis struck in the autumn of 2008 and was the first Central and Eastern European country to go cap in hand to the IMF for a €20bn loan that year. As such, its government has been busy since cutting spending and raising taxes to bring the budget deficit down from a peak of 9.3% of GDP in 2006 toward the mandated 3.8% in 2010. These austerity measures have hit the population hard and the likely winner in the April 11 elections, the opposition Fidesz party, which has a three-to-one lead over the governing Socialist Party, has made a series of comments about breaching that budget deficit ceiling, perhaps by as much as double.

Regardless, Janos Samu, an analyst with Concorde Securities in Budapest, reckons the deficit will reach 5.7% of GDP this year, because revenue will fall short of estimates while spending exceeds the plan. "We see an underestimation of expenditures and overestimation of revenue in the 2010 budget," says Samu. "Strains among institutions providing public services increased, which adds to the risks of this year's outcome."

The upshot of overshooting the target is that it could force the new government to impose further fiscal discipline while under pressure to steer the country out of the recession, because a failure to curb the deficit would make it difficult to attract investors to forint-denominated debt and thus force the government to seek further IMF financing, Samu said.

The political risk is also elevated in Bosnia-Herzegovina, where elections in October promise to make an already fragile situation worse. The country is hampered buy its complex political make-up that was the result of the 1995 Dayton Peace Agreement, which ended the Bosnian wars. The EU wants to strengthen the central powers over the two halves of the country, a Muslim-Croat Federation and a Serb Republic, while the latter particularly wants to keep its autonomy and, indeed, threatens to extend that to its logical limit of independence. In February, Bosnian Serb lawmakers approved legislation making it easier to call a referendum, a move seen by critics as paving the way for an independence vote later this year.

The political wrangling mask the country's dire economic situation. With growth of only 0.6% expected for 2010, following a 3.5% contraction in 2009, jobs continue to evaporate. The IMF is making noises about not approving the release of the second tranche of Bosnia's €1.2bn stand-by arrangement until its two entities pass disputed laws curtailing transfers of public money to social groups, especially war veterans. Sadly, economic issues don't seem to be a priority for Bosnia's politicians, who instead choose to campaign on nationalistic differences. "The citizens of Bosnia have for years opted for the worst from amongst their 'own' national ranks, in order that they would protect them from the worst from the ranks of the 'others'," says Aleksandar Trifunovic, editor-in-chief of Buka magazine. "Hence, the majority of citizens will continue to vote for the same politicians; the ones who have created this political and socio-economic environment."

Moldova too faces potentially pivotal elections, though as it stands none have been officially called yet. The country has been stuck in a constitutional crisis without an elected president since July when an EU-oriented reforming coalition called Alliance for European Integration managed to oust the statist Communist Party administration led by the then-president Vladimir Voronin. However, Moldova's unique constitution sees the president elected by a three-fifths majority of the unicameral parliament, but the coalition is one MP short of the 61 votes needed, and the now-oppositional Communists are in no mood to compromise on a candidate.

The optimistic view is that fresh elections would nudge the coalition over the winning line, and allow them to press on with reforming the economy and bringing down the budget deficit to 7% in 2010. But with the crisis causing GDP to collapse by 8.5% in 2009 and household consumption to drop by around 12%, some worry the opposite could happen from a backlash against the unpopular, but necessary, budget reductions and price liberalization.

Latvia too faces bruising general elections in October, though the dire economy and fragmented politics mean it's debatable whether the present government under Prime Minister Valdis Dombrovskis can survive that long. Since 1990, Latvia has had 13 governments.

The latest polls put the Harmony Centre, a centre-left party that mainly represents the Russian-speaking population, as the strongest party with almost 16% of the vote. "Its focus on social policies will be hard to associate with the very tight fiscal policies needed for the adoption of the euro in the foreseeable future," says Anna Kopetz, economist for the Baltics at UniCredit.

Unity Coalition - a grouping established last year of New Era (which currently holds the PM office), Civic Union and the Society for Different Politics - has about 13% of the vote, and would stand for a continuation of the current economic policies of collaboration with international lenders and the clear goal of euro adoption in 2014.

The Czechs will go to the polls no later than June 2 and, judging from the latest polls, look set to remain as polarised as ever. The main Czech political parties, the left-wing CSSD and centre-right ODS, are attracting between 25% and 30% of the vote, meaning election stalemate (and a possible grand coalition), a minority government or a weak coalition - pretty much what the country has endured for the past few years and not what the markets would like, which is a clear-cut victor with a mandate to reform. "The next government will need to tackle the issues of fiscal imbalance, healthcare financing and pension reform, but the risk is that its weak mandate may restrict the economic agenda," says Pavel Sobisek, chief economist at UniCredit.

The Czech Republic looks as though it will continue to muddle along, less a victim of political risk than political inertia.

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