Hungary still in the first line of dominoes

Hungary is farther away from the center of the crisis than it was in 2008, but it is still in the first line of dominoes, being one of the top ten riskiest countries in Europe, Zsigmond Járai, chairman of Hungary’s Fiscal Council said at an event organized by the Joint Venture Association. “The good news is that at least it is not the first this time, and I do not see a chance of a Europe-wide crisis spreading from here. On the other hand, if a financial crunch starts somewhere else in Europe, which has a 20-30% probability, it could hit Hungary really hard,” he added. 

Fortunately, there are large reserves in next year’s budget, at HUF 400 billion, or more than 1.5% of GDP, which could be enough, if used properly, to reach the government’s macroeconomic targets, said Járai. The bill targets a general government deficit of 2.5% of GDP and projects 4.2% annual average inflation along with at least 1.5% GDP growth. 

In terms of the central budget, Hungary has always had a bad track record, being the only country that has never met EU budget criteria and has been under the excessive deficit procedure ever since its accession to the EU in 2004, Járai pointed out. Due to this and to the country’s high indebtedness in Swiss francs, the government has no other choice but to submit a restrictive budget. 

In times of a global downturn, the government and the central bank (MNB) are supposed to be pumping money into the economy in line with the principles of an anti-cyclical economic policy, Járai said. The Orbán government’s first attempt to launch such a policy in May 2010 failed within a week, resulting in a mini currency crisis, he noted. 

Uncertain environment

Since then, the international environment has deteriorated further, Járai said. This is reflected by a quick reduction in the MNB’s GDP growth forecast for 2012, from 1.7% to 0.5% within the past month. He attributed this pessimism primarily to the development of the global economic environment. He noted that GDP growth in Germany, Hungary’s main export market, is expected to fall to 1.3% in 2012 from 2.7% this year. 

By themselves, the three main macroeconomic indicators show positive developments, with a narrowing budget deficit, decreasing government debt and a positive current account balance, Járai said. “However, if we take a closer look at how the government has reached its goals, we see that the necessary measures, including the bank levy, the extraordinary taxes and the management of the FX loan problem, have created uncertainties and unpredictability that hurt the positive message of the stable macroeconomic indicators.” 

The 2012 budget bill carries serious risks, Járai pointed out. Nobody can predict the growth rate among eurozone members, or what will happen to Greece and other troubled eurozone countries. Another major risk is that the budget is not backed by the necessary legislation yet. Although budget bills are usually submitted sometime in September, the necessary laws are worked out only by the end of December. For instance, the government has calculated 2012 budget revenues from VAT with the new 27% rate, long before the amendment has even been passed.

Reforms still missing 

Referring, among other things, to the planned decrease in health care and education spending, Járai said that the new rules would generate countless conflicts and tension. However, the Fiscal Council believes that the lion’s share of structural reform is missing from the budget. The planned cuts in expenditures could be reached only by speeding up the restructuring of the large state systems. 

In Hungary, decreasing state expenditures is a priority, Járai said. While the Hungarian government redistributes 50% of GDP, the figure is only 40% for its competitors. Next year, the rate will stand at around 48%, which is a step in the right direction, but far from enough to boost the economy. 

It is also unclear how the government aims to boost investments and employment. A basic requirement would be a stable and predictable business environment, which will be missing next year. Uncertainties around Swiss franc indebtedness will give another blow to predictability, he noted.

Reducing bureaucracy is a key issue; all the relevant rules should be revised in detail and simplified as soon as possible. “If we cannot support businesses financially, the least we could do is create conditions under which they can simplify their operations,” Járai stressed. The bureaucracy-related burdens of Hungarian entrepreneurs are estimated to be 2-5% higher than those of their European peers. 

Hungary pays extremely high interest on its debts, about 150-200 basis points higher than neighboring countries. In 2010, total debt service accounted for more than HUF 1,130 billion, which equals the country’s total annual health expenditures. Reducing risks through predictability, transparency and security is the only way of reaching lower yields on debt, Járai added.