Hungary Faces Increasing Pressure from Abroad

2010-09-03

Prognosis

 

Hungary Faces Increasing Pressure from Abroad

  • A fresh wave of pessimism appears set to inundate the global financial markets. More and more analysts are predicting that the 2008 global recession will be W-shaped, meaning another period of GDP contraction is imminent. Investors’ appetite for risk will likely diminish in the coming months, wreaking havoc with the forint-exchange rate and the bond market. This spells trouble for Hungary.
  • The flagging forint has reignited interest in the question of whether Hungary should renew its standby loan agreement with the International Monetary Fund. Unless the forint falls through the floor, the government is unlikely to take a concrete position on the IMF question until after the October 3 local elections wrap up. IMF-bashing is popular at home, but the government will continue sending signals of a possible new loan agreement abroad.    
  • The pessimistic market mood decreases the government’s chances of persuading the European Union to grant Hungary a higher budget-deficit target for 2011. The EU, which regulates budget deficits in prospective Eurozone members, will conduct its annual negotiations with member states in October. The administration risks denting Hungary’s international reputation if it even tries for a looser deficit target.
  • Hungary’s room for fiscal maneuver next year will become clear during the first weeks of October. That is when the EU and the IMF delegations will conduct their quarterly review of Hungary’s economy and also when the government must submit its draft budget for 2011. The EU probably will not give Hungary much more fiscal leeway than it did in earlier agreements, meaning Hungary will be forced to keep the 2011 deficit below 3% of GDP. The government will probably respond with a new corporate tax similar to the bank tax to avoid putting the squeeze on individuals.
  • If the administration decides to take out a new IMF loan after all, Fidesz will probably say its hand was forced by the deteriorating global economy. Government communicators will try to de-emphasize the new loan agreement and play up other themes – the new Constitution, tax cuts for 2011, and “calling to account” the ex-governing Hungarian Socialist Party (MSZP) in connection with corruption.

Orbán Assesses His First 100 Days at the Helm

  • Hungarian Prime Minister Viktor Orbán will reflect on his government’s first 100 days in office in a speech on September 7. The premier is expected to highlight items that Fidesz can use in its municipal-election campaign: Reducing the number of local-government councilors, tax cuts, the bank tax, Fidesz’s “can-do” governing style and its efforts to promote national pride.
  • Given the uncertainties about the 2011 budget and deficit target, Orbán will probably stick to talking about general policy concepts: Reducing bureaucracy, support for small- and medium-sized enterprises (by redirecting EU funds), future tax cuts and the need to boost Hungary’s prestige on the international stage.
  • International prestige includes preparing for Hungary’s turn at the EU’s rotating presidency, which begins in January 2011. Hungary is expected to actively utilize the opportunities offered by the EU presidency to realize its own interests. We expect the Orbán administration to launch more and more foreign-policy initiatives in the near future – which means a higher risk burden.

Municipal Elections: Bare Ballots

  • Fidesz’s changes to the election law have made it hard for politicians to run for Budapest mayor. With just hours to go before the deadline, only two candidates - István Tarlós (Fidesz) and Csaba Horváth (MSZP) – could be sure that their names would appear on the ballot. Gábor Staudt of the ultra right-wing Jobbik party and Benedek Jávor of the leftish-greenish Politics Can Be Different (LMP) party stood a decent chance. The low number of candidates on the ballot will significantly diminish the stakes in the race for Budapest mayor and reopen debate over changes in the ballot-access rules.
  • Smaller parties – especially the LMP – can still be active in the Budapest campaign even if their candidates fail to make it onto the mayoral ballot. People will still be able to vote for these parties’ district-council candidates and possibly their lists for City Council.
  • Ballot-access problems will refocus criticism on Hungary’s system of nominating candidates through nomination slips (see below). Opposition parties may begin offering alternative systems during the autumn session of Parliament.
  • Internal erosion within the MSZP is expected to accelerate following its all-but guaranteed defeat in the municipal vote.
  • Jobbik, once the bad boy of Hungarian politics, has proven to be much more reticent now that it is in Parliament. Tensions within Jobbik are palpable; these are likely to become more pronounced following the election.

 


 

 

 

Key events to watch

 

Economic Events

 


 

 

Political Events

 

 

 


 

 

Analyst consensus

 

 

 


 

 

Leading Trends

 

Municipal Elections in Budapest

 

Ballot access is more difficult than ever

  • One of Fidesz’s first initiatives was to raise the bar for ballot access in local elections. Nominees in many communities must collect more “nomination slips” than before, and Fidesz cut the collection period from 36 days to 16. (Nomination slips are small sheets of paper that voters sign and hand over to candidates they support. Candidates must collect a certain number of slips in order to get on the ballot, depending on the population of the constituency in which they are running.)
  • Candidates have until September 3 to collect their slips. Mayoral candidates in Budapest have the toughest job: They must collect slips from 2% of all voters in the capital, instead of 0.5% under the old rules The government has also tightened the requirements for parties to submit candidate lists for
    • the 145 towns and cities that have more than 10 thousand inhabitants
    • the 23 districts in Budapest
    • the 19 county assemblies
    • the Budapest City Council.
  • Nomination-slip fraud has been a serious problem in all previous elections. For example, unscrupulous impostors may persuade elderly voters to hand over their slips without filling in the candidate’s name; they then sell the papers to candidates who need them. The new rules provide a greater incentive for these kinds of abuses.  

Likely Candidates for Budapest Mayor

  • István Tarlós, the "joint" candidate of Fidesz and its subgroup, the Christian Democratic People's Party (KDNP) is certain to get on the ballot. The Hungarian Socialist Party (MSZP)'s Csaba Horváth is also assured a spot.
  • As this report went to press, it appeared possible that Benedek Jávor (LMP) and Gábor Staudt (Jobbik) would collect enough nomination slips to qualify for ballot access.
  • Andor Schmuck, administrator of a pensioner club called the Honor Society (Tisztelet Társasága), is running as an independent with the support of the non-parliamentary Hungarian Social-Democratic Party (MSZDP). Schmuck was the sole independent candidate who had a realistic chance of collecting the 28,000 nomination slips needed to get on the ballot. As this report went to press, it appeared he would not succeed.

Parties Likely to Run for Budapest City Council and in the county assemblies

  • Elections for Budapest City Council and county assemblies are conducted through party lists, not individual candidates.
  • All parliamentary parties (Fidesz-KDNP, MSZP, Jobbik and LMP) are expected to be on the ballot for Budapest City Council. Non-parliamentary parties such as the Hungarian Democratic Forum (MDF) will find it all but impossible to enter a list.
  • Parliamentary parties are also expected to be on the ballots for each of Hungary’s 19 county assemblies. Regional parties or civic groups may also appear on the ballot in several counties.
  • Small parties will have a tougher time getting into both Budapest and county government: Fidesz raised the threshold for representations to 5% from 4%.

Election odds in Budapest

  • Barring an extraordinary development, victory is all but guaranteed for Fidesz's István Tarlós. The only question is whether Fidesz can win an outright majority on the council. If Budapest residents vote as they did in the April 2010 general election, Fidesz will win 17 of the 33 council seats. Since the mayor also takes part in city council votes, Fidesz may secure a majority with relative ease.
  • However, turnout at municipal elections is always significantly lower than at general elections. It remains to be seen which party’s supporters will be the most motivated on October 3. It is also uncertain whether people who cast ballots for the MDF last April will bother turning out, and if they do, whom they will back.
  • Support for Fidesz has not declined significantly since the general election. Fidesz will need to focus on mobilizing its electoral base during the coming campaign. If the party proves to be more effective than its rivals in turning out the vote – even by a small margin – Fidesz will gain an outright majority in the City Council.

Balance of forces in the Budapest City Council (2002 and 2006)

Colored sections indicate parties in the Budapest City Council's ruling coalition.

*In 2006 the MSZP and the SZDSZ won precisely the 50% of city council seats, but were still able to govern thanks to the vote of Mayor Gábor Demszky (SZDSZ). The coalition split in 2009.

 

 

Parliamentary election results in Budapest (April 11, 2010)

 

Potential fallout from the election

  • Fidesz is certain to win all county elections, and may even win an absolute majority in all county assemblies as well. (Fidesz took 18 out of 19 counties in 2006.)
  • In addition to Budapest, Hungary has 23 politically important cities with county authority” – cities whose councils assume the functions of county governments. (Residents of these cities do not vote in county-assembly elections.) Socialist mayors were able to win just seven of these cities in 2006; this time the MSZP can hope to hold on to just Szeged and Miskolc. The main question is whether Fidesz mayors in these cities will enjoy an absolute majority on the city councils, or whether Fidesz will have to form a coalition with another party (or independents).

Hungary’s Many-Headed Economic Policy

 

In its August 25 inflation forecast, the Hungarian National Bank (HNB) painted a much darker picture of the country’s economic prospects than had appeared in its previous forecast three months earlier.The HNB raised its inflation forecast for 2011 and 2012, predicting a weaker forint and higher energy and food prices. The bank also lowered its GDP growth estimates for both years. Furthermore, the central bank predicts Hungary will be unable to meet the budget-deficit targets spelled out in its euro-convergence plan: The forecast sees the 2010 budget deficit at 4.3% of GDP instead of 3.8%, revenue from the new bank tax notwithstanding. The HNB estimates a wider gap for 2011, with the budget deficit at 4.1% of GDP instead of 2.8%.

 

Meanwhile, the Budget Council, an independent government agency, said August 18 the 2010 budget-deficit target was theoretically attainable, but only if the government does not spend any of its reserves and ministries obey orders to restrain spending. However, another HUF 185 billion may be needed for 2011 if Hungary is to meet its convergence commitments, the report said.

 

 

 

 

The forint began to drop once again in the second half of August, partly because of the HNB’s pessimistic prognosis, but mostly because of investor jitters stemming from weak U.S: macroeconomic data. Hungary’s Economy Ministry temporarily halted the currency’s slide August 24 when its communications people sent an e-mail to Bloomberg News saying they planned to sign a new loan agreement with the IMF in October. This turned out to be yet another communications blunder: Just hours later, the ministry denied the existence of any such plan, sending the forint back on its downward trajectory.

 


 

It is entirely possible that the Economy Ministry’s communications office sent the e-mail in error. It is far more likely that the government is deliberately taking a two-faced approach to the IMF loan: One for domestic audiences and one for the international investment community. The markets, clouded by uncertainty and the looming threat of a W-shaped recession, view Hungary as a “problem child” with a staggering public debt and sluggish economic growth.  For precisely this reason, Fidesz does not want to shut itself off from the possibility of a new IMF loan package – at least not in the eyes of foreigners.

 

 

 

Fidesz’s Legislative Agenda for the Autumn Parliamentary Session

 

Parliament’s 2010 autumn session, which begins September 13, portends a busy legislative agenda, especially for November and December. Lawmakers are set to debate four government bills in October, 22 in November and 16 in December.

Unlike the spring session, the government will be submitting the lion’s share of the bills, not MPs. Ministries will probably have more time to examine legislation and there will be more time for coordination. The plans indicate that the government is not planning to pass any amendments to the Constitution; however, all constitutional amendments in the spring session were submitted by individual MPs (with one exception). It therefore cannot be ruled out that Fidesz will pass some major legislation that is not included in the official schedule.

 

We must also remember that MPs still need to vote on several bills introduced last spring. The most famous of these is the “media constitution,” which drew international condemnation in relation to its restrictions on the free press. Fidesz MPs – not the government – will introduce four wide-ranging amendments to this bill: One of these will make it clear that the proposed rules do not apply only to radio and television, but to the print media and internet as well.

 

A bill that promises to be particularly important is the new law on making laws. The current rules on how a bill becomes a law have been on the books since 1987; proposals for a new system have been on the agenda for more than a decade. The government has no choice but to take action now since the Constitutional Court struck down the current law on December 31, 2009. This law will determine the process of codification, the rules of order and which institutions will contribute to the lawmaking process.

 

Another highly important bill on the agenda would create central government offices in counties and in the capital. This would entirely restructure mid-level government bureaucracy in Hungary and further tighten centralization of power. There is also a proposal to merge the Hungarian tax authority, APEH, with the Customs and Finance Guard (VPOP).

 

Fidesz plans to restore a law that makes it possible for new mothers (or sometimes fathers) to stay home with their children for up to three years with government benefits (Orbán’s predecessor, former Prime Minister Gordon Bajnai, cut the maximum maternity-leave period to two years in 2009). Fidesz also has some populist reforms in store for the pension system: The government wants to make it possible for women to retire after 40 years in the workforce, regardless of how old they are.

 

Last but not least, the 2011 budget will make its way to the Parliament floor during the autumn session, along with separate legislation authorizing budgetary operations. The public will finally be able to learn the details of Orbán’s plans for implementing the 16% flat income tax. People also will be keen to see the bill that will establish electricity and natural gas prices.

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