When Hungary's PM talks, business shudders

By bne IntelliNews August 6, 2014

Kester Eddy in Budapest -


Viktor Orban has grabbed the headlines once again: his extraordinary declaration late in July that China, Russia and Turkey were better models for Hungary to follow than the “failed” liberal West sent shockwaves throughout the US and Hungary's EU partners.

Hungary's mercurial prime minister was speaking at an annual ethnic Hungarian gathering in the Carpathian mountains, central Romania. According to Orban, the 2008 economic crisis had exposed the fallacy of western capitalism, with the result that “the hottest intellectual topic today is the comprehension of systems which are non-western, non-liberal... perhaps which are not even democracies, and they still make some nations successful.”

To survive in the new, competitive world, Hungary should look to the likes of China and Russia, he continued. “Societies built on the principles of liberal democracies will not be able to maintain their global competitiveness in the next decades; rather, they will be forced to retreat unless they are capable of significantly remodelling themselves,” he said.

Given that a deadly conflict was underway in neighbouring Ukraine involving one of these supposed model nations even as Orban spoke, it was little wonder that the initial media attention focused on the political ramifications of his address. After all, critics asked, should the EU, which advocates democratic pluralism, continue funding a member state whose leader openly not only advocates autocracy, but whose moves in the past four years have systematically removed or circumvented the checks and balances on political power?

But what are the implications for business, given that Orban's core rational for his new Hungary is, as he put it, to create a “a new Hungarian state which is capable of making our political community competitive in the great global running race in a ten-year horizon”?

Difficult times

For many business sectors – most notably the banks, telecommunications, retail and utilities – the past four years under Orban's Fidesz party has proved hectic, if not ruinous.

Yet for some months prior to the elections in April, the prime minister and government officials had indicated that the worst was over. Extreme measures had been needed for an extreme situation in 2010 – or so the argument went – and a win for Orban in 2014 would usher in a calmer period of “consolidation.”

That, at least, was the hope. “There is absolutely no sign of consolidation,” says Szabolcs Kerek-Barczy, a board member of the Democratic Coalition, a small centrist opposition party led by former prime minister Ferenc Gyurcsany.

Kerek-Barczy points to the pressure put on the banks and non-governmental organisations (NGOs) almost immediately after the elections. The banks certainly face enormous costs – estimated at up to €3bn – due to government measures forcing them to repay customers for charges now deemed “unfair” on retail loan contracts.

As even Sandor Csanyi, chief executive of OTP, Hungary's largest bank (and someone with political sympathies somewhat akin to the prime minister) noted, these costs will “severely damage” the economy, because banks will be unable to provide loans as a result of their weakened capital base.

But ruining the banking sector's profitability dovetails with Orban's declared plan of raising Hungarian ownership within the sector to a minimum of 50%. As BayernLB, the owner of MKB, Hungary's fourth largest bank, proved in July, any foreign owner that decides to cut its losses will find a ready buyer in the Hungarian state – albeit it at a beaten-down price.

The government has championed the renationalisation of MKB – a move which has been declared of strategic importance, thereby bypassing the scrutiny of the competition office – as a great achievement for the nation, and also promised to re-privatise MKB at some future date.

Opposition groups are highly sceptical. “The government always refer to national interests, that they want to keep profits in the country and stop what they call 'extra profits' leaving the country. But this is a lie. The intention is to hand over newly acquired companies to friends of the government,” says Kerek-Barczy.

Indeed, Kerek-Barczy, who worked with the very first Orban administration for a year in 1998, is particularly scathing of his former employer. “No business is safe in Hungary at the moment. It is not an exaggeration that private property in this country can be taken away any time and foreign investors can be called rogue agents if they do not collaborate unconditionally with Orban's government,” he tells bne.

Not all are so pessimistic, not least in the real economy, where a clutch of foreign investors has announced expansions in their Hungarian operations in the last month, most notably Wanhua Industries of China, which is going ahead with a new €84m hydrochloric acid plant at its BorsodChem plant in north-east Hungary.

But the global investment community is taking note of Orban's moves, says William Jackson, emerging markets specialist with London-based Capital Economics. And while the negative influence of the Ukraine crisis on the region makes it difficult to know the extent to which Orban's speech alone has damaged businesses confidence, it “adds to the series of events which have hurt Hungary’s business environment, heightened uncertainty for firms and eroded the quality of governance in the country,” he says.

Further, with Orban enjoying a strong mandate following April’s election, there seems to be little reason to think that things will change, Jackson argues. “The most recent talk of forcing banks to convert household foreign-currency loans into forint has spooked investors – the forint is the worst performing [emerging market] currency since mid-May. And looking ahead, Hungarian equities and the forint are likely to continue performing poorly,” he says.


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