Hungary: investing in Hell

By bne IntelliNews February 16, 2015

Kester Eddy in Budapest -


Hungary is backing investments in Hell. Really.

The Hungarian Investment Promotion Agency (Hipa), the state office charged with boosting trade and investment, has signed a “cooperation agreement” designed to “support the expansion” of Hell. A deal with the devil? Not quite. Hell, in this instance, is a Magyar energy drink that Hipa is keen to promote: so it's all just a catchy marketing stunt. The joke, however, is probably lost on those investors whose Hungarian experience has proved diabolical.

The list is long: it includes electricity, gas and water utilities, banks, telcos, retail, real estate, agriculture, media and recycling companies, all of whom complain – sometimes publicly, more often in private – of sudden legislative changes, usually enacted without consultation, that have turned their business model upside down, and sometimes closing it altogether, often to the benefit of domestic competitors. Most, but not all, affected are foreign-owned, typically with German, French, Austrian or a US parent.

Common to all these complaints is a government led by Viktor Orban, a former law student and anti-communist firebrand who heads Fidesz, the party he helped found in 1988 and which today claims to be “moderate conservative”: critics label it nationalist-populist, even autocratic.

But on February 9, in a surprise deal, Orban, for the Hungarian state, along with the European Bank for Reconstruction and Development (EBRD), signed a memorandum of understanding to each take up a 15% stake in Erste Bank's Hungarian subsidiary. Erste pledged to support the Hungarian economy with a new loan package worth €550mn, while the government promised to both reduce the bank tax and provide a level playing field for all in the banking market while supporting growth through a “predictable” regulatory and legislative environment.

Triumph of hope over experience

All sides hailed the agreement – originally proposed by Erste – as a turning point in the previously stormy waters of Hungarian government-banking relations, while stressing it also had positive ramifications for the broader economy. After admitting to the earlier “difficult relationship” between the banks and the government, the time had come “to move forward”, EBRD chairman Suma Chakrabarti told MTI, the state news agency, after the signing.

The markets certainly welcomed the news: shares in OTP, Hungary's largest bank, jumped almost 5% on the day of the announcement, adding another 4.4% the following day. But while the news was universally welcomed, long-time observers of Orban's Hungary were understandably cautious. “Perhaps it's hope over experience, in the sense that the government will take a less interventionist approach, [but] I think the government has finally realised that if the banks are hit with extra taxes, plus the effects of the forced exchange of FX loans into forint, it severely hits their ability to do business,” Nigel Rendell, economist with London-based Medley Global Advisors, yells bne IntelliNews.

Part of the problem for Orban's government is what Rendell termed the “artificial measures” to encourage lending to business, primarily the central bank's 'Funding for Growth programme', which has proved “less successful than many in government had hoped,” he says.

And with Orban famously pledging to create 1mn new jobs prior to elections back in 2010 – a pledge looking ever more difficult to honour half way through the time plan – action was needed. “Therefore, much better to cut the taxes, leave the banks alone to do what they do best  lend to the private sector. This should boost the domestic economy and ultimately the country's longer term growth potential,” he says.

But, as even the EBRD's Chakrabarti admitted, rebuilding trust after a sustained period of unpredictable behaviour is “always the most difficult thing”.

Rendell is less diplomatic: not only has Hungary become “an unpredictable destination for many foreign investors” under Orban, but investor sentiment has been further damaged by his praise for Russia and Turkey during last summer's infamous “illiberal democracies” address, he said.

Some relief

Clearly, the big question is whether Orban can be trusted to hold to the deal. Erste feels that the role of the EBRD is, if not a trump, at least an ace in the arrangement. The London-based bank has pledged to “strongly support” and “careful monitor” the deal, which is subject to six monthly reviews.

This, along with the personal involvement of Prime Minister Orban at the signing, points to a “strong commitment” by the government to carry this through, Axel Reiserer, the EBRD spokesperson, tells bne IntelliNews“Thirdly, and this goes beyond the EBRD, but we think is the strongest point, having acquired more than 50% of the Hungarian banks, I think the government has begun to realise that bashing the banking sector is no longer productive… it's shooting itself in the foot,” Reiserer said.

Although it was unusual for the EBRD to partake in a deal which enlarged state ownership of any sector, in the Erste case it was an encouragement for Erste, as a large, private bank, to stay in the country, Reiserer argued.

Of course, even assuming the Orban administration keeps its word, as Mihaly Varga, the economy minister admitted on February 10, the bank tax will still remain “quite high” after the planned cuts. For the banks then, the new deal will bring positive relief, but no return to the heady, heavenly profits attainable before the crash of 2008. A kind of purgatory, perhaps  but that's still better than investing in hell.

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