Saxo Bank CIO: “I’ve seen the future and it’s bleak”


From the Budapest Business Journal print editon: European economies are on the wrong trajectory in how they address the crisis while trying to indefinitely put off any extensive reforms, and Hungary is the worst offender, according to Saxo Bank’s chief investment officer Steen Jakobsen. 

“We could not have had a worse start to the year than the January just past. The European Central Bank, International Monetary Fund and World Bank all increased their growth projections in January and before the ink on the press releases was even dry, emerging markets started tanking. Talk about an inverse indicator, so get this IMF, World Bank and ECB goes directly from an upped growth forecast that stated the recovery is coming to crisis alertness. Will this persuade them to revisit their models? Hardly...”

Jakobsen is a vocal critic of how the leaders of the European Union are acting to address the continent’s economic crisis. His main concerns involve a return to planned economies, where an over imposing and interventionist approach is becoming the main tool that decision markers chose. In this aspect, Hungary is the perfect case study.

“The thing to fear is not ‘Japanization’, but rather ‘Hungarization’. Hungary has a government and policy hell bent on reducing its fiscal deficit, its methods being increased direct and indirect taxes, meddling with the independence of the central bank, under-investing and forcing its banks to pay a levy in the name of securing its customers from the pain of risk-taking entirely on their own device.”

The idea that everyone can have a surplus while reducing debt is “idiotic” and the fact that the actors in the matter are the central bankers is plain wrong. Jakobsen, however, stresses that although he is not a fan of central banks, they are innocent in terms of the direction things are heading. They are, after all, only carrying out policies that are decided by the countries’ politicians.

In Hungary, matters are even worse. Any and all fiscal adjustments are financed from taxes, the central bank has no independence, and there is hostility towards non-residents even though foreigners hold some 45% of stock, while disposable income is in the dumps. As an unsurprising consequence, Hungary is falling behind in overall competiveness, even when compared to the other European counties that are following similar paths, Jakobsen said.

While expecting a small uptick this year in Hungary, Jakobsen still sees a forint weakening of 5% to 10% in addition to the January slide by the end of the year, with the overall turmoil in Europe and the eurozone opening a new chapter with this year’s European Parliamentary elections.

The Danish economist spoke further with the Budapest Business Journal about current economic issues after telling reporters what he means by ‘Hungarization’ and why he would rather invest anywhere else in the world than Budapest.

BBJ: Seeing consistent improvements in the output figures this year, do you think that the fourth quarter and consequently aggregated 2013 GDP figures could cause an upward surprise?
Jakobsen: A slight adjustment is a possibility. However, anything gained in the fourth quarter of last year basically disappeared in the past two weeks, during the course of the current emerging market crisis. Also, Hungary is still very far from any recovery, since the minor growth only compares to zero or recession. I like to say, don’t call me until GDP returns to 2008 levels, and Hungary is still far from that.

Do you see any chance that government measures – early repayment of foreign currency loans, utility fee reductions – could have led to a trend-turn by stoking domestic consumption through increasing disposable income?
Anything gained is taken away with the 27% VAT level, not to mention the other burdens that government measures directly or indirectly place on households. Just the recent increases in bank costs mean that household expenses are increasing. This comes alongside the highly restricted lending potential of the banks thanks to the repeated and increasing taxes they have to bear, which is also an obstacle to household purchases.

Hungary’s sovereign debt rating is in the junk domain with all three major rating firms. Is this a concern? Are rating agencies even that important?
If I were the Hungarian prime minister or finance minister, what the rating agencies say wouldn’t be a particular concern. What I would be concerned about is implementing the needed structural reforms. However, this is a long-term process that doesn’t rhyme well with politics. The in-depth changes that are needed could take something like 10 years and have to be implemented gradually. You can’t simply fire 50% of the public sector overnight.

The government is actively promoting a bigger role for the state in the banking sector. Is that a viable scenario and are there examples where such an arrangement works?
State ownership growing is a very likely scenario based on what’s happened thus far. Simply put, it would be a waste of money. Banking is for the bankers, it’s not the state’s job. I have no knowledge of any country where such a setup would operate effectively. If there is, I would very much like to hear about it.

The new management of the National Bank of Hungary introduced a new communication regime this year, scrapping press conferences after rate calls and releasing statements that contain forward looking statements. How do you rate this approach and the MNB’s credibility?
Central banks’ forward guidance basically isn’t worth the paper they are written on. We’ve seen that central banks always make the worst predictions. We all tend to make poor choices, but the central banks are always the worst offenders. Besides, why would I want the central bank’s opinion about what it’s planning to do, when I could just ask Orbán, right?

Recently a former tax authority employee claimed there was an extensive VAT fraud scheme involving food products on a regional basis and which allegedly amounts to HUF 1 trillion in damages a year. Do you think this a realistic possibility and do you have knowledge of such cases in other countries?
I don’t know the specific case, but if you have a 27% VAT rate, there is always a propensity. I’d say such an arrangement was very much feasible. The Hungarian tax rate is the highest in the European Union and as such, products being transported could go from 0% to 27% just by crossing a border. In this sense, any fraud and the related damages that the economy suffers are self-inflicted.

You seem to have a very grim view of Hungary’s economic outlook. Isn’t there any positive element that you could name?
This country has tremendous potential. The people are traditionally excellent traders, it has a great location within Europe and there is immense potential within the high-level education system. Still, this will only remain a potential as long as there isn’t a better system of taxation, extensive reforms and an end to deconstructing the constitutional framework.

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