Robert Smyth in Budapest -

Despite his reform project being severely paralysed after defeat in a national referendum and his party's coalition with the Free Democrats (SZDSZ) shattered, under pressure Prime Minister Ferenc Gyurcsany on June 11 argued there is still important work to be done in turning Hungary's economy around and vowed to steer his Socialist party to the 2010 general election. But is there life still left in his isolated government or is it just treading water?

"Life in terms of survival is possible until the next general election in 2010, although not in terms of the PM having sufficient power to initiate and implement policies," argues Gergely Hudecz, associate at Global Economic Research in Oxford. "The minority government is simply paralysed."

In March, Gyurcsany not only lost face when the public rejected in a referendum his plan to levy fees on visits to the doctor, staying in hospital and studying, he also lost the trust of the public at a crucial time for Hungary. He then proceeded to sack the health minister, Agnes Horvath, a member of the junior coalition SZDSZ party and one of the architect's of the health reforms, which inevitably led to the break-up of the governing alliance as other SZDSZ ministers quit the coalition.

Gyurcsany has since reorganized his cabinet, appointing either allies or Socialist party heavyweights, although analysts predict that the longest serving, Agricultural Minister Jozsef Graf and Economy Minister Gordon Bajnai, are likely to remain the most influential. However, the upshot is that the PM will now be forced to back off taking any meaningful reforms that were so crucial to helping the moribund Hungarian economy finally turn a corner. The reforms had reduced an unacceptably high budget deficit through both an increase in revenue from higher taxes and a reduction in government expenses; this economic straitjacket will now have to be abandoned in pursuit of much-needed popularity. A recent Szonda Ipsos poll on the popularity of Hungarian politicians puts Gyurcsany second bottom of the pile, while opposition leader Viktor Orban of Fidesz is only kept off top spot by the widely popular president Laszlo Solyom. It will be some consolation to the PM that the person below him is Janos Koka, the leader of former coalition partner SZDSZ.

Blood in the water

Can the government even survive until the 2010 elections? Orban is sensing blood in his battle against the beleaguered PM, and is moving in for the kill. He is seeking to cooperate with the SZDSZ to dissolve parliament and force early elections. Certainly, the Socialists can't count on the SZDSZ support in getting the 2009 budget passed by the end of the year. "SZDSZ itself needs 5% of the vote to stay in the parliament after the next election and has to show that it is in some way independent of the government. I wouldn't exclude the possibility of early elections," Balint Torok, an analyst at BudaCash brokerage, says.

Further, while this year's targets concerning the budget deficit and very strict EU convergence programme can be met, next year will more difficult. "The question will be how the government can reduce expenditure further and increase taxes without firm public backing, while an increase in public expenditure is unavoidable in the run-up to an election," says Torok. What's more, the government has already increased pensions and raised wages significantly in the public sector.

Torok also disputes the government claim that the worst is over. "Tax increases and cost cutting, as well as changing the whole system of pension and social security, is necessary to get to reduce the budget deficit to 3% by 2010, which is only really possible from a new government with strong public backing." He warns that the health and pension systems could collapse in five to 10 years if things are left as they are.

Nevertheless, Gyurcsany will be buoyed by GDP growth predictions in the June 2 GKI Economic Research/Erste Bank Current Forecast report, which suggest the Hungarian economy will climb out of last year's "hole" in the second half of 2008. That's a revision of the report's May 5 prediction that the recovery wouldn't happen until the end of the year. "In the year as a whole, the expansion of the economy is expected to reach 2.5-3% in 2008 and in the second half of the year the growth rate will be around 3.5%," says the latest report. This compares with 1.3% growth in 2007.

Can the upcoming privatisation wave sufficiently line government coffers to eliminate Hungary's still crippling budget deficit or is it a case of selling off the last state assets to raise money to bribe voters with popular spending projects?

The government is readying a number of large privatisations: the state electricity company MVM and the State Lottery Company are already on the block, while the state motorway company is apparently also being prepared for an IPO. The latter is expected to be extended from a motorway services operator to a concession operator that operates the infrastructure and gets the fees.

The government programme on "ownership creation" aims to stimulate the economy rather than the stock exchange, s spokesperson for the Budapest Stock Exchange told bne. "The ownership creation programme goes beyond stimulating the stock exchange or improving Hungarians' possibility of wealth increase. It could increase domestic fiscal income and provide domestic state-owned enterprises with an opportunity to become regional, multinational players."

However, there is also distinct whiff of electioneering in the air. "Privatisation might save the prime minister in a political sense, earning public and business support, but it probably won't have a great affect on the budget deficit," asserts Hudecz.

The proposed privatisation is much more about political survival, the primary goal is to survive and get to the next general election in 2010, declares Torok. "Survival is unfortunately more important to the government than solid macro performance." He also doubts the macroeconomic value in the proposed plan of selling packages of shares in state companies directly to the people. "This looks a case of vote buying and I'm not sure if it would be successful and whether people would actually be interested in buying shares in struggling Hungarian companies," says Torok. He adds that those who can afford to buy shares in the first place would more likely opt for those in profitable and more prosperous foreign companies.

Furthermore, the offering of tax breaks to investors in the new companies is neither a move geared to fixing Hungary's long-term economic health problems, but stinks of blatant vote canvassing. Hudecz furthers that despite official comments about the objective of changing public attitudes toward investing, it seems that electioneering is the bottom line.

Gyurcsany, who earlier managed to woo Hungarians with his bold and confident rhetoric, is finding that politics is much more than a war of words, but ultimately a game of hard numbers - and his number might just be up.

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