Govt critics deride Hungary's Potemkin economy

By bne IntelliNews October 20, 2014

Kester Eddy in Budapest -


Rozsa Beer is crystal clear when it comes to offering her opinion on the Hungarian economy. Mrs Beer, 59, who has retired from running a small knitting business with her husband, reels off a list of reasons why she and her family are happy with local economic developments.

"We've got a large house in the Budapest suburbs, and the utility bills have really got cheaper because of the [government mandated] regulated price cuts,” she says.

Her daughter, who is buying a house with a foreign-exchange based mortgage loan, expects to see a “significant” reduction in monthly repayments due to the government's efforts to get such loans judged “unfair.”

Meanwhile, having just had a baby, the same daughter will see will see the extra housekeeping costs greatly eased by the latest child benefit schemes.

“She can get full child allowance after going back to work when the baby is 12 months. This, and the personal income tax rate [of 16%], really favours families with kids," she says.

Little wonder Mrs Beer voted to give Viktor Orban and his conservative-nationalist Fidesz party a second consecutive four-year term in general elections last April – she “fully agrees” with government slogans that “Hungary's doing better.”

Stats behind the slogans

Regardless of the prodigious output from its formidable communications system – which typically repeats the same upbeat news items in several thinly disguised packages – the government claims are not mere rhetoric: the Hungarian economy grew beyond most analysts' expectations to hit 3.7% in the first six months, buoyed by a strong performance in construction – up 19% in the second quarter – and manufacturing, which continued to benefit from the expanding automotive sector.

Meanwhile, unemployment statistics for July, released earlier in October, put the jobless rate at 7.8%, down from 10.2% a year earlier, and good in comparison to the European average of, coincidentally, also 10.2%.

Based on such figures, together with the healthy current account surplus and the added fillip of the International Monetary Fund (IMF) raising its forecast for full-year growth to 2.8%, Orban boasted in a statement prior to the EU summit in Italy on October 8 that Hungary had “proved that jobs can be created while budget discipline is sustained and state debt reduced.”

While this conveniently ignored news that Hungary's public debt had climbed to a record high of 85% of GDP at the end of the second quarter, the economic progress, real or perceived, helped ensure Fidesz won out in local elections throughout Hungary on October 12 – replicating the party's victories in the general election of April and European Parliament election in May.

However, the seemingly good news – and its sustainability – is, needless to say, questioned by economists and opposition leaders alike. 

The employment statistics – boosted as they are by Hungarians living abroad but still registered in Hungary, and by public works schemes designed to get the long-term unemployed into some sort of work routine – are treated with particular scepticism. “This government promised 1m new jobs [in the next decade] when they came to power in 2010. They have created nothing in terms of private sector jobs – no net jobs whatsoever. The public sector jobs [public works schemes]… are not sustainable from an economic point of view,” says Lajos Bokros, a professor at the Central European University and former finance minister in the 1995-96 Socialist-liberal coalition. 

As for GDP growth, while analysts accept the veracity of the data, its make-up is considered less than ideal. “This year, the expansion is partly connected with temporary effects, such as very high funding from the European Union, much of which has financed the boom in [state-driven] construction projects,” Andras Vertes, chairman of GKI, a Budapest economic institute, tells bne.

True, with inflation at around zero, real earnings are expected to rise by between 3-4%, in turn boosting consumption by some 2% – a level not seen since 2006. Yet despite this, and the boost to higher earners by the introduction of a flat rate tax in 2011, Hungarians on average are worse off than a decade ago. “Consumption in 2014 will be 0.5% above that in 2010, but still 2% below the level of 2004,” Vertes says.

At the heart of the matter is the uncertain business environment caused by erratic government policy since 2010.“There has been a deterioration in the investment climate, and legal security due to bad governance, including hostile policy to the banks,” says Vertes. This in turn has led to a decline in investment. “Net foreign direct investment over the first six months this year was zero. If you exclude the various bank recapitalisations, it was negative,” he says.

The latest government measures aimed at forcing banks to repay the costs to customers of "unfair" changes to interest rates on household loans, plus the future mandatory conversion of foreign-currency loans into forints at an as-yet unknown discounted exchange rate, is adding huge uncertainties in the financial sector, Vertes argues. True, this will ultimately reduce the foreign-currency risk of households, buthitting the banking system by another HUF1,000bn (€3bn), the estimated costs of repaying the 'unfair' costs, will make the recovery of business lending impossible,” he says.

This, and talk of additional austerity measures to keep the budget deficit to below 3% of GDP, makes many a Magyar wary of the economic future.

Awaiting passengers for his cycle rickshaw in downtown Budapest, Gergely Nagy, 33, certainly sees his financial circumstances very differently from Mrs Beer. “I was an entrepreneur, but there was no government support for the self-employed, whatever they say,” he tells bne.

As for growth of 3%, “I've not experienced that. This is my second, third job even. I'm a swimming instructor at a hotel for my main work,” Nagy says, “If you have to live off one job in Hungary, it's darned difficult.”


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