Passing the budget is the key to success for the Hungarian government

2009-09-24

Prognosis

 

Government stability and budget

  • In the coming period, the government’s success depends on the passage of the 2010 budget, fundamentally accepted by international investors, as well as adherence to key 2009 budget figures. If these conditions are met, an improving consensus developing among international investment circles can be sustained.
    • The two key issues of the 2010 budget are municipalities and community transport; the opposition is expected to focus its attack on these two items. However, the largest danger threatening the budget may come from a revolt of locally strong Socialist politicians worried about their future position. While the Socialists are expected to support the budget, they may significantly soften it with a series of amendments.  
    • Holding this year’s deficit target represents a major challenge as the national budget deficit has already reached the target established for the entire year. Accordingly, in the last few months of the year public funds must produce a surplus, a feat without precedent in the past eight years.
  • Gordon Bajnai has declared that he would resign in case of the 2010 budget is not passed in the parliament in November, putting pressure on socialists. However, he is rather expected to consolidate his position in respect to MSZP.
    • MSZP has failed to put its house in order; the party continues to be characterized by internal conflicts and a series of scandals. In the meantime, the government has been delivering on its commitments, has successfully maintained the image of a firm and competent governance, while its international standing is steadily improving.
    • In the past few weeks the Prime Minister took firm positions on a number of issues not directly related to the crisis: this indicates that in the coming period he plans to seize the political initiative from the chronically paralyzed socialists. Gordon Bajnai has no short-term political goals. Instead, he is evidently preparing for his political come-back at a later date.
    • Based on recent public-opinion polls, support for the government increased in the past few weeks, and the latest data indicates that this trend has helped MSZP's popularity as well.
  • In the autumn season the opposition is also expected to build its campaign on the mistakes of the Gyurcsány-era: the public has developed a much stronger opinion on the previous administration than on the Bajnai-cabinet. With a comfortable lead in the polls, this strategy presents the least risk for the opposition. Consequently, in the coming months the opposition will communicate the message that the Bajnai-cabinet represents nothing but a continuation of the Gyurcsány-era.
  • Due to past failures the issue of healthcare, considered one of the major targets under attack is a sore point for the Socialist party. By focusing on this symbolic issue, Fidesz could further intensify internal conflicts within MSZP.
  • In the coming period various civil and labour organizations (representing local- government employees, railroad and healthcare workers) are expected to challenge the government and one can expect to see simultaneous strikes and demonstrations in several sectors. This, in turn, could weaken the resolve of some socialist politicians.

 

Opening of Parliament's autumn session

  • On the whole, during the autumn session one can expect that parliamentary partisanship will take a back seat.
    • In light of the above considerations, in the coming months the following image may become dominant: the government has a supportive faction and, instead of the socialist parliamentary panel, in most cases the initiative is taken by the cabinet.
    • In the past few months the factions of MDF have disappeared, SZDSZ has no strong influence while an increasingly dominant Jobbik has no representation in Parliament. These organizations, or at least their prominent politicians, are expected to remain active in the future, i.e., extra-parliamentary politics may come to the fore.
    • During the autumn session and following the passage of the new Civil Code, the budget debate will take centre stage and Parliament is not preparing to take decisions on other major political issues. However, as the cabinet hopes to pass the budget bill as early as in November, we could see the shortest de facto Parliamentary session since the regime change.

 

Improving economic outlook

  • The economic outlook is expected to continue to improve in the coming period: increasingly, data coming from the United States and Western Europe indicate that the worst of the crisis is over and a slow recovery could be on the way, whose positive effects will be felt in Hungary as well.
  • Assessment of the country continues to improve, especially in respect to regional countries, which could offer a major boost in restarting the economy. To maintain the momentum, this year the major task is the maintenance of the established deficit target; instead of its importance for the macro economy, because the confidence of international investors is based on the improved health of the budget.
  • In the past few weeks we have seen the start of a strong rate cutting cycle that, according to most analysts, may continue at a larger-than-expected rate and by the end of the year the base rate could shrink to around 6%. The National Bank of Hungary’s rate policy is clearly related to the country’s improving international standing. In the wake of recent rate cuts, political attacks aimed at the central bank may subside.

 

Jobbik's retreat in respect to the Hungarian Guard

  • Jobbik's objective is to ensure that it withdraw support from the legally banned Hungarian Guard, maintain the image of a party respecting democratic rules, while avoiding the charge of surrendering its positions. Therefore, in future the party is not expected to go against the court's decision; instead, it will try to run the Guard by looking for legal loopholes, further testing the limits of the rule of law. This purpose may be served in the medium term by the establishment of the Gendarmerie (not banned by law at this point) as a substitute for the Guard.
  • Recently both the government and the justice system have taken increasingly firm positions against radical organizations, which means that the establishment of the Gendarmerie (while intending to “tame” the Guard) will lead to further conflicts with the establishment. The increasing autonomy of the Guard and its split from Jobbik continue to pose a major threat.

 


 

Key points to watch: calendar

 

Economic events

 

23.09. Retail sales (KSH, july 2009)
25.09. Statistical report (KSH, july 2009)
28.09. The Monetary Council's meeting (base rate setting)
28.09. Employment and unemployment (KSH, jan.-jul. 2009)
29.09. Industrial producer prices (KSH, august 2009)
30.09. Aggregated balance sheet of credit institutions (NBH, august 2009)
30.09. Household and non-financial corporations sector interest rates (NBH, august 2009)
30.09. Balance of payments, international investment position (NBH, Q2 2009)
30.09. Balance sheet of investment funds (NBH, august 2009)
01.10. Financial accounts (NBH, Q2 2009)
01.10. Securities issues statistics (NBH, august 2009)
01.10. Data on general government (KSH, Q2 2009)
01.10. External trade (KSH, jan.-jul. 2009)
05.10. Benchmark yields on government debt securities (NBH, september 2009)
05.10. Average yields of government securities at auctions (NBH, september 2009)
05.10. The Budapest Stock Index (NBH, september 2009)
05.10. The Monetary Council's meeting
06.10. Preliminary data about the change in the industrial output (KSH, august 2009)
07.10. International reserves (NBH, september 2009, preliminary)
08.10. External trade (KSH, jan.-aug. 2009)
12.10. Statistical balance sheet (NBH, september 2009. preliminary)
12.10. Agricultural prices (KSH, jan.-aug- 2009)
13.10. Consumer prices (KSH, september 2009.)
14.10. Industry (KSH, august 2009.)
15.10. Average daily turnover reported by resident credit institutions on the Hungarian FX market (NBH, september 2009.)
16.10. Construction (KSH, august 2009.)
19.10. International reserves – foreign currency liquidity (NBH, september 2009.)
20.10. Number of employees and earnings in the national economy (KSH, jan.-aug. 2009)
22.10. Retail sales (KSH, august 2009.)
28.10. Statistical report (KSH, august 2009.)
29.10. Employment and unemployment (KSH, jul.-sep. 2009.)
30.10. Aggregated balance sheet of credit institutions (NBH, september 2009.)
30.10. Household and non-financial corporations sector interest rates (NBH, september 2009.)
30.10. Balance sheet of investment funds (NBH, september 2009.)
30.10. Industrial producer prices (KSH, september 2009.)
30.10. External trade (KSH, jan.-aug. 2009)

 

 

Political events

 

12.12. MSZP nominates its prime ministerial candidate
30.09. The Day of Municipalities – expected to focus on the government's budget cuts affecting local governments
01.10. Date of the introduction of the so-called health-care core financing
  Local security details may start patrolling
02.10. Ireland holds a referendum on the Lisbon Treaty
06.10. Parliament’s general budget debate gets under way
07.10. Planned date of strike by medical professional protesting core financing
11.10. Early mayoral election in Dombóvár
30.11. Expected date of budget vote in Parliament
09.12. The mandate of State Audit Office president, Árpád Kovács, expires

 

 

 

 


 

 

Leading Trends

 

Parliament’s opening session, 2010 budget

 

The passage of the 2010 budget bill will top the agenda at Parliament's autumn session. The government is not preparing deep structural reforms; its major objective is to prepare a budget that can meet the established deficit target. This will require further spending cuts, although, due to the upcoming general election, instead of welfare benefits directly affecting the population, the government will try cut corners at the expense of municipalities and community transport, i.e., these two issues will be the focus of parliamentary debate.


Next year’s budget must be extremely tight again as due to declining industrial output and tax cuts revenues collected by the government are considerably reduced. Revenues will also decline due to the likely continued rise in the rate of unemployment, while on the spending side resources for welfare will have to be increased. According to calculations by the Finance Ministry, the combined revenue shortfall will come to HUF 400 billion. Resources will be slashed from community transport (HUF 40 billion) and municipalities (HUF 120 billion), and the balance will come as a result of last year’s measures, i.e., the elimination of the 13th month pension, changes in pension indexing, a wage freeze and the reform of housing subsidies, whose effects will be felt already in 2010.


As things stand today, the government majority continues to be guaranteed; through November it may be under more threat from MSZP than SZDSZ. While there is tension between the Liberal party and its parliamentary panel, under the leadership of János Kóka the faction provides firm support for the government. While the Socialist party has been unified behind the government following its inauguration, the expected defeat at the polls and the rapid decline of acceptable political positions may intensify conflicts within the party and force some socialist representatives to develop an independent agenda.

 

 

 

Fidesz: new season – warmed over strategy

 

Although no new strategic direction has been outlined at Fidesz’ political season-opening conference, some important statements have been made in the past few weeks. Viktor Orbán announced the nomination of István Tarlós for the 2010 Budapest mayoral race. In this case, instead of its content, the early date of the announcement generated some surprise. However, conditions in the capital are currently chaotic: the governing MSZP-SZDSZ coalition does not have a solid majority, while interests and interest groups intersect along several fault lines. With its earlier announcement, Fidesz may have intended to communicate its preparedness and competence in this area as well. Tarlós’ early nomination may also be explained by the fact that his potential rivals, Zoltán Pokorni and Antal Rogán, instead of close allies are usually considered as Viktor Orbán's most likely challengers. If, as is his habit in respect to other positions, the party president waits to the last minute with his nominations, in the long-term he may consolidate the positions of people looking to replace him.


Shortly after his season-opening speech, Viktor Orbán announced an interview that following the elections and his party's expected victory, he will immediately submit a new budget. This makes eminent sense. As in the coming six months every effort will be made to attack the budget, its implementation at a later date may lead to contradictions. However, as he made a case for a new start the supplementary budget will have to be significantly different (at least at the symbolic level) from that proposed by the Bajnai-cabinet. This, in turn, may lead to conflicts in talks with the IMF, which is satisfied with current developments. As in the coming period Fidesz would challenge spending cuts for municipalities and community transport, taking the deficit target as granted, in the supplementary budget the party will have to find resources in other areas, which may result in renewed discontent among the electorate.

 

Primary party preferences in September

(with the change over the previous month in paranthesis)

 

Institute Medián Századvég-Forsense Szonda Ipsos
Size of sample 1200 1001 1500
       
  All voters
Fidesz-MPSZ 46(+1) 25 (-10) 34 (-2)
MSZP 14(+1) 14 (+3) 13 (+1)
SZDSZ 1 (-) 1 (-) 1 (-)
MDF 1 (-) 1 (-2) 1 (-1)
LMP 2 (-) 1(-1) 1 (-)
Jobbik 6 (-) 6(-1) 6 (-1)
Other 1(-1) 2(+2) 2 (-)
DK / NA 29(-1) 50 (+7) 42 (+3)
       
     Comitted voters with party preferences
Fidesz-MPSZ 67(-1) 57 (-6) 60 (-3)
MSZP 18(+2) 25 (+8) 23 (+5)
SZDSZ 1 (-) 1 (-) 1 (-)
MDF 1 (-) 1 (-3) 2 (-)
LMP 1 (-) 2(-2) 2 (+1)
Jobbik 10(-1) 12 (+2) 11 (-1)
Other 2 (-) 2 (+1) 2 (-)

 

 

The Bajnai-cabinet's political activism

 

Compared to the strategy followed after his inauguration, in the current political season the Prime Minister has opted for a distinctly different style: last spring he concentrated exclusively on crisis management measures and their implementation, rather than their communication to the population. However, since then the crisis has subsided to a great extent and the country is not facing the threat of collapse i.e., in his communication Gordon Bajnai has started to focus more on issues outside the realm of economic policy. While the Prime Minister maintains the image of a technocrat government prepared to take difficult decisions and contemplate long-term considerations, increasingly he also tries to promote the image of a leftist government concerned with the fate of the poor and those in need. In addition, it has called attention to public safety and the plight of the Roma population. In respect to the first issue, thanks to impressive measures (the hiring of police officers, more training for the police, and installation of surveillance cameras) the government has immediately scored some symbolic points. The government’s Roma policy does not involve structural reform and here as well mainly symbolic issues were given centre stage: despite a hiring freeze, the prime minister promised to hire more Roma in public administration.


Concurrently, the Socialist party has gained a few percentage points in the polls (while Fidesz lost some ground), which indicates that the strategy has been successful in the short term. Presumably, in reaction to these developments, increasingly voices in and around MSZP are calling for the nomination of Gordon Bajnai as the party’s next prime ministerial candidate in 2010. With all that, the Prime Minister is unlikely to have changed his position announced in the spring (he would accept the mandate only for one year). It appears more likely that he uses the current situation to lay the foundation of his political come-back at a later date.

 

 

The first-year anniversary of the crisis: out of the trough?

 

Current economic developments continue to point to an upward trend: published macro economic data match or surpass earlier projections and international confidence in Hungary is visibly on the rise. Having reached the bottom this year, the so-called CDS-premium indicating sovereign default risk has come close to the level last measured before a crisis. While the forint lost some ground in the past few weeks, this was due primarily to the pricing of expected rate cuts rather than the country's deteriorating economic outlook. In other words, on the first anniversary of the crisis, on the whole it appears that at the cost of serious losses and requiring international assistance, Hungary has survived the crisis triggered by the collapse of the secondary credit market in the United States.


Making the most of current trends, last week Finance Minister Péter Oszkó announced that Hungary can again contemplate the date of introducing the common currency. The announcement may be important when one considers that in the past year almost all regional countries got further from joining the monetary union, while Hungary, due primarily to its poor past performance, has narrowed the distance in the medium term. Taking advantage of this dichotomy, compared to other countries in the region Hungary could take the lead in the eyes of investors.

 

 

 

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