Hungary govt trumpets success as elections approach

By bne IntelliNews January 22, 2014

Kester Eddy in Budapest -

Late Saturday night, and Erzsebetvaros - Budapest's hip, downtown quarter, packed with trendy restaurants and take 'em as you find 'em "ruin pubs" - is abuzz.

Even in January, any stranger happening upon the many revellers stumbling along the irregular pavements could well believe the government of Viktor Orban, Hungary's former anti-communist student dissident-turned-conservative prime minister, has got it right. "Hungary's Performing Better", so the Magyar rulers' slogan reassures the ruled on every available occasion. And the out-of-season jollity in Budapest's very own Bohemian quarter would seem to support this thesis.

Of course, such fleeting street vignettes could never justify serious conclusions regarding a national economy: for that, one needs hard data. The government is more than happy to provide: with the economy bottoming out - or as the authorities would prefer it, turning to growth - in 2013, and elections due on April 6, its communications staff are on overtime cranking out the positive.

Just three of the latest headlines on the government website read: "New record high, 4 million 12 thousand, ... in work," (economy ministry, January 7); "Economic sentiment index at 10-year high," (January 9); and "Record low inflation in December" (January 16).

Such claims cannot, surely, be without substance? Despite the unorthodox measures, the hurried, punitive taxation measures meted out from 2010 on utilities, telecommunication firms, banks and large retailers (perhaps not coincidentally, all sectors predominantly owned by foreign investors), and despite the legislative upheavals which have had resulted in European watchdogs questioning Hungary's commitment to democratic norms - is Hungary on the mend?

Gyorgy Barcza, economist with Szazadveg, a right-leaning think-tank and editor of business daily Napi Gazdasag, is in no doubt. "Any assessment of Hungary should be based on facts, not feelings... I think last year was proof that things have started to improve. For the first time in 40 years, Hungary has been accelerating on a balanced path, [whereas] usually the economy accelerated based on domestic demand, and that ruined our external balances," he says.

The key data appear straightforward enough. In the third quarter of 2013, year-on-year economic growth - adjusted for calendar effects - hit 1.6%. Headline inflation for December, at a new record low of just 0.4%, meant average inflation for last year came in at 1.7%. With the base interest rate trimmed for the 18th consecutive month to a record low of 2.85% on January 21, the budget deficit set to come in at around 2.7% of GDP, and unemployment dipping to 9.3% - a four-year low - government trumpet blowing is understandable.

Even abroad, observers have reacted positively: in a particularly upbeat January analysis, Charlie Robertson, of Renaissance Capital, noting the "best business confidence figures for 15 years," forecasts 2.5% GDP growth this year, and 4% in 2015 - well above consensus predictions of 1.8% and 2.0% respectively. "Hungary's recovery is strong, broad-based and good news," Robertson concludes.

Not all are so bullish. William Jackson, at London's Capital Economics, says that while the economic confidence figures would imply economic growth surging to around 5.0% in the fourth quarter, there have been previous instances when the headline figures have spiked, but resulting growth has been muted. Jackson is awaiting further data before making any revision to his prediction of 2% expansion this year.

In Hungary, opposition politicians are predictably more critical. Lajos Bokros, former finance minister and author of the 1995-1996 austerity programme, emphasises that, despite the recent economic expansion, output is sill below pre-crisis levels. "Three things are missing in Hungary: economic growth, investments and jobs. In all these respects Hungary is far behind the Visegrad and Baltic countries, which are useful reference points. Hungary has not yet achieved its pre-crisis output; the rate of investment is just 16%, which is below replacement rate; and the job numbers have been created exclusively by the state in bureaucracy and public works," he says.

Bokros, an economist who now heads the "Movement for a Modern Hungary" (a small party he terms "genuinely conservative" in the western meaning of the words), stresses that both the low unemployment and high labour participation rates are further massaged because the statistics include large numbers of Magyar workers based abroad.

Laszlo Akar, vice-president of GKI Economic Research Institute, a left-leaning think-tank, largely concurs. "Quite clearly the figures show improvement, but growth in 2013 was mainly due to the nice weather, as agriculture was up more than 20% [on 2012]. There has been no improvement on the 2010 performance," he says, the recent data, at least in part, are "window-dressing."

Further, the improved budget deficit figures are at the cost of what he terms the "anti-reform" government measures to nationalise the private pension system.

Akar, who forecasts just 1.3% economic growth for 2014, says the Orban government's hostility and drive to nationalise the foreign-owned banks and big utilities, along with unpredictable economic policies has ruined business confidence, deterring both domestic and international investors in the real economy.

All this means that, prior to the elections, the government will continue with both rhetoric and its PR offensive on the perceived achievements, while avoiding genuine high-risk moves, such as any drastic efforts to solve foreign-currency loans, since this could undermine the forint.

Nevertheless, "drastic" interference," Akar warns, "cannot be ruled out." He adds: "It's not a main scenario, but it's a potential danger."

The markets seemed to have noticed. The forint has weakened around 1.7% since the New Year, making it the worst performing currency in Central and Eastern Europe.

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