Hungary

Politics:

• Analysis

  Hungary finance: Orban's soldiers

  Hungary's central bank: Orban's soldiers

  The government entrenches its power, to the European Union's dismay

  GYORGY MATOLCSY'S first day at work as governor of Hungary's central bank, on March 4th, caused joy for government loyalists and gloom for foreign investors and the European Union. He is a close ally of Viktor Orban, the prime minister. As economics minister in Mr Orban's government, he pioneered such policies as nationalising private pension funds, taxing foreign investors and fighting the EU and the IMF.

  The fear is that, under Mr Matolcsy, the central bank will be subordinated to the government. He is one of "Orban's most loyal soldiers" who has "completely destroyed the government's fiscal-policy credibility," says Mujtaba Rahman of Eurasia, a think-tank. "Now he risks doing the same to monetary policy." Yet Mr Matolcsy downplays such fears. He has promised a conservative, responsible monetary policy and to safeguard the central bank's independence.

  Markets are rattled by the government's erratic economic policies. Investment fell in both 2011 and 2012. GDP shrank by 0.9% in the fourth quarter of last year. Foreign banks, unwilling to pay high taxes, have nearly ceased lending. The economy may stagnate this year, according to the IMF. Households owing big debts, often denominated in foreign currency against a sliding forint, are hardly able to raise spending.

  The government points to new investment deals with such big companies as Nokia, Siemens, Microsoft, IBM, Coca-Cola and GE. Its unorthodox measures are working, it claims. At the end of 2012 the public debt stood at 79% of GDP, a sliver below the level in early 2010. The bond market is stable: most government-debt issues were oversubscribed in 2012. Bond yields have fallen to 5.6%, the lowest level in seven years.

  Yet this enthusiasm may be rooted in excess liquidity, not greater trust. Andras Simor, the outgoing governor, was well regarded. By contrast Mr Matolcsy is just the latest Orban loyalist appointed to formerly independent institutions. He is a mercurial figure who has criticised "speculators" betting against the forint and accused banks and multinationals of attacking the government with "all possible means". In his final days as a minister he rewrote the rules to give the central-bank governor more power. Few believe that his goal was to strengthen the institution's independence.

  March 09, 2013

• Background

  Hungary: Political forces at a glance

  Political outlook: Political forces at a glance

  Current government: Hungary is a parliamentary democracy, with members of parliament (MPs) elected to four-year terms under a system of proportional and direct representation. The centre-right Fidesz-Hungarian Civic Union (Fidesz) won a landslide victory in the most recent election, in April 2010, obtaining 262 of the 386 seats in parliament (with one more seat held by the Christian Democratic People's Party, which is affiliated with Fidesz). Viktor Orban, the leader of Fidesz, is the prime minister. The Hungarian Socialist Party (MSZP), which held power in 2002-10, has just 48 seats following the defection of ten members to the newly formed Democratic Coalition (DK) in October 2011. The far-right Jobbik holds 47 seats. Parliament elected a new president, Fisesz politician Janos Ader, to a five-year term in May 2012. Although a largely ceremonial position, the president has the power to veto legislation.

  Parliamentary forces
  	% of vote in	No. of seats in
  	election	parliament
  	2010	2010	2012
  Fidesz-Hungarian Civic Union	67.9	227	226
  Hungarian Socialist Party	15.3	59	48
  Jobbik	12.2	47	46
  Christian Democratic People's Partya	0.3	36	37
  Politics Can Be Different	4.2	16	15
  Democratic Coalitionb	-	-	10
  Independents	0.3	1	4
  a The Christian Democratic People's Party stood on a "joint party list" with Fidesz. b Formed in 2011.
  Source: National Election Office.

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  Next elections: The next parliamentary and municipal elections are scheduled to be held in 2014 and the next presidential election is scheduled for 2017.

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  June 01, 2012

• Structure

  Hungary: Political structure

  Official name

  Hungary

  Form of state

  Multiparty republic

  Legal system

  Based on a new constitution that entered into effect on January 1st 2012, replacing the constitution of 1949 (substantially altered in October 1989)

  National legislature

  Unicameral parliament of 386 members, of whom 176 are elected from single-member constituencies

  Electoral system

  Universal direct suffrage over the age of 18

  National elections

  April 2010 (parliamentary), and May 2012 (presidential); the next parliamentary and municipal elections are scheduled for 2014; the next presidential election is scheduled for 2017

  Head of state

  President; Janos Ader, elected to a five-year term by parliament on May 2nd 2012, following the resignation of Pal Schmitt

  National government

  A centre-right majority government, led by Viktor Orban and comprising Fidesz-Hungarian Civic Union and the Christian Democratic People's Party (KDNP). The government has 263 seats in parliament

  Main political parties

  Fidesz-Hungarian Civic Union (Fidesz); Hungarian Socialist Party (MSZP); Christian Democratic People's Party (KDNP); Jobbik; Democratic Coalition (DK); Politics Can Be Different (LMP)

  Prime minister: Viktor Orban (Fidesz)

  Deputy prime minister & minister for public administration & justice: Tibor Navracsics (Fidesz)

  Deputy prime minister: Zsolt Semjen (KDNP)

  State secretary & head of the Prime Minister's Office: Janos Lazar (Fidesz)

  Key ministers

  Agriculture: Sandor Fazekas (Fidesz)

  Defence: Csaba Hende (Fidesz)

  Foreign affairs: Janos Martonyi (Fidesz)

  Interior: Sandor Pinter (Fidesz)

  National development: Zsuzsanna Nemeth (Fidesz)

  National economy: Gyorgy Matolcsy (Fidesz)

  Human resources: Zoltan Balog (Fidesz)

  Central bank governor

  Andras Simor

  January 01, 2013

• Outlook

  Hungary: Key developments

  Outlook for 2013-17

  • The centre-right Fidesz-Hungarian Civic Union (Fidesz) has the strongest government mandate since the fall of communism, enabling it to pass or amend legislation without the need for political compromise.
  • Fidesz remains committed to its centralising and populist policies, despite clashes with the EU and the IMF. Despite recession and falling popularity, we expect Fidesz to remain in power after the election in 2014.
  • Hungary has requested a bail-out from the EU/IMF. Following an eight-month delay, talks began in July; a second round is due at end-January. A deal is unlikely before mid-2013, given Fidesz's reluctance to compromise.
  • The euro zone recession in 2012-13 will have a negative impact on Hungarian growth, and we forecast a further contraction in real GDP in 2013, of 0.4%. We forecast average annual real GDP growth of 2.7% per year in 2014-17.
  • Hungary's five fiscal consolidation packages are estimated to have brought the budget deficit within the 3% of GDP limit in 2012, but we forecast that the deficit will grow to 3.1% in 2013 and average 3.8% in 2014-17.
  • Increases in value-added tax (VAT), new sector-specific taxes and food price rises following a bad harvest will push inflation to an estimated average of 5.7% in 2012. Inflation is forecast to average 3.7% per year in 2013-17.
  • The forint is set to appreciate gradually against the euro from 2012, but will remain subject to volatility, given the country's high debt levels.

  Review

  • On November 26th a Jobbik lawmaker provoked outrage in Hungary and abroad when he demanded in parliament that Hungarian Jews be catalogued and screened on the grounds that they posed a "national security risk".
  • Parliament has adopted a new electoral law introducing voter pre-registration. The changes are likely to favour Fidesz at the polls in 2014.
  • The banking sector recorded a combined net loss of Ft10.2bn (US$45m) in the third quarter, amid massive deleveraging. Loan quality has continued to worsen, with non-performing loans making up 13.8% of the total volume.
  • In November the public sector posted a cashflow deficit of Ft33.6bn, bringing the cumulative budget deficit for the first 11 months of the year to Ft691.7bn, or 120% of the annual target.
  • Real GDP contracted by 1.5% year on year in the third quarter, owing to poor agricultural output and a steep decline in household consumption.
  • In November consumer price inflation slowed to 5.2% year on year, its lowest level in 2012. This could pave the way for further interest rate cuts.

  January 01, 2013

Economy:

• Background

  Hungary: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	10.0	Population growth	-0.2
  GDP (US$ bn; market exchange rate)	138.7	Real GDP growth	-0.6
  GDP (US$ bn; purchasing power parity)	195.5b	Real domestic demand growth	-2.4
  GDP per head (US$; market exchange rate)	13,890	Inflation	5.4
  GDP per head (US$; purchasing power parity)	19,578b	Current-account balance (% of GDP)	-2.4
  Exchange rate Ft:US$ (av)	201.0	FDI inflows (% of GDP)	2.7
  a Actual. b Economist Intelligence Unit estimates.

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  Background: After 20 years of communist rule and state planning, in the 1960s Hungary embarked on a series of economic reforms aimed at developing a market-based system, but there was little political liberalisation and reforms flagged. Communist rule ended when free elections were held in March and April 1990. Consecutive reform-minded governments took power, taking Hungary into the EU in May 2004. The centre-right Fidesz-Hungarian Civic Union (Fidesz) secured an unprecedented two-thirds parliamentary majority at the parliamentary election in 2010.

  Political structure: Hungary is a multiparty democracy. The unicameral parliament has 386 members: 176 from single-member constituencies, 140 from regional lists and 70 from a national list. Members of parliament (MPs) are elected for four-year terms. The president, who is elected by parliament for a five-year term, has little real power and is largely a figurehead. The judiciary is nominally independent, but the executive exerts considerable influence and has limited the power of the Constitutional Court to rule on fiscal matters. A new constitution was enacted in January 2012.

  Policy issues: The government faces two broad policy challenges: consolidating the public finances and jump-starting economic growth. Public debt is among the highest in the EU, surpassing 80% of GDP in 2010 and 2011, which has put fiscal consolidation at the top of the government's policy priorities. Labour market reforms, aimed at increasing employment and boosting the labour force participation rate, are integral to the government's plans to arrest the current trajectory of slow growth and rising debt.

  Taxation: The rate of corporate tax is 19%. For companies with a tax base (profit before taxes) of less than Ft500m (US$2.5m), the rate of corporate tax falls to 10%, with certain restrictions. Since 2011, personal incomes have been taxed at a flat rate of 16%. Rates of value-added tax (VAT) and compulsory social security contributions, including mandatory payments to private pension funds, are high. The VAT rate for most products and services is 27% (since January 2012).

  Foreign trade: Almost 80% of exports are directed to the EU. In 2010-11 the current account posted average surpluses of 1.4% of GDP, the first since the 1990s, owing to a sizeable trade surplus. A recovery in external demand, following the global financial crisis of 2008-09, bolstered exports, and ongoing weakness in domestic demand restrained imports.

  Major exports 2011	% of total	Major imports 2011	% of total
  Machinery & equipment	57.1	Machinery & equipment	47.0
  Manufactures	29.1	Manufactures	33.4
  Food, beverages & tobacco	7.2	Fuels & energy	12.3
  Raw materials	2.9	Food, beverages & tobacco	5.0
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Germany	25.3	Germany	25.0
  Romania	5.8	Russia	8.8
  Austria	5.5	China	8.5
  Slovakia	5.5	Austria	6.3

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  January 01, 2013

• Structure

  Hungary: Economic structure

  Data and charts: Annual trends charts

  
  

  

  January 01, 2013

• Outlook

  Hungary: Country outlook

  Hungary: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The centre-right Fidesz-Hungarian Civic Union (Fidesz) has the strongest mandate of any government since the end of communism. Fidesz holds 263 of the 386 seats in parliament. The government has pursued a populist and nationalist agenda that satisfies its domestic supporters with little regard for international opinion. In May 2012 Janos Ader was elected president despite protests from opposition parties at the appointment of a Fidesz politician to the largely ceremonial position.

  ELECTION WATCH: The next general election is scheduled for 2014. The Economist Intelligence Unit expects Fidesz to win, but with reduced support compared with 2010, reflecting the tough economic environment, and the implementation of unpopular austerity measures. As the incumbent party at the next election, Fidesz will struggle to evade responsibility if economic conditions fail to improve. For the remainder of its term, it will strain to balance voter expectations with the pursuit of sufficiently restrictive fiscal policies to regain international investor confidence.

  INTERNATIONAL RELATIONS: Fidesz's populist and authoritarian tendencies have led to tension with its EU partners, such as over the new constitution. In 2012 the EU launched legal proceedings against Hungary over several laws deemed to erode the independence of the judiciary and the national data protection office. In November 2012 the European Court of Justice (ECJ) upheld the EU's argument that the forced early retirement of judges was illegal. The two sides also clashed over the issue of central bank independence, although this has now been resolved.

  POLICY TRENDS: The government faces two challenges: reviving economic performance and consolidating the public finances. It eschewed outside help for the first part of its term, but in November 2011 it announced that it would seek a EUR15bn (US$21bn) three-year financing agreement with the IMF and the EU. The country's previous, EUR20bn loan programme with the EU and the IMF lapsed prematurely in 2010 amid disagreement over macroeconomic policy. Talks on a new loan agreement started on July 17th after Hungary addressed international concerns over central bank independence. A second round of talks is scheduled for end-January 2013; however, the IMF and government are deeply divided over measures included in the 2013 budget, which was adopted in mid-December 2012. The government is under pressure to reform several core policies that it has implemented, including the flat personal income tax of 16% and its reliance on extraordinary taxes, such as the utility infrastructure tax and a crisis tax levied on the banking sector, to meet budget shortfalls. The IMF is likely to insist on structural reforms such as of the oversized public sector, of local and regional government, and of state-owned enterprises. If the government eventually agrees to the policy conditions, the IMF programme could support debt financing in the short term. Even without an IMF programme, a recently adopted residency-for-investment programme, offering permanent residency to foreigners buying at least EUR250,000 in "residency bonds," should support medium-term debt financing. However, long-term public debt sustainability remains a concern.

  ECONOMIC GROWTH: Real GDP growth reached 1.6% in 2011, supported by agricultural output and industrial exports, following an expansion of 1.3% in 2010. In January-September 2012 real GDP contracted by 1.3% year on year (by 0.7% in the first quarter and 1.5% in the second and third quarters), owing to falling exports, construction and the drought-hit agricultural sector. We estimate that the euro zone, Hungary's main export market, contracted by 0.5% in 2012 and forecast it to contract by 0.2% in 2013. Given the euro zone recession, fiscal consolidation, high unemployment and tight credit conditions, we estimate that real GDP contracted by 1.4% in 2012 and expect Hungary to remain in recession in 2013, with GDP contracting by 0.4%. Although structural weaknesses will persist, domestic demand should return to growth in 2014, allowing real GDP growth to average 2.7% in 2014-17. The economy has underperformed since 2006, partly owing to the uncertainty created by the chronic budget deficit and high debt levels.

  INFLATION: The National Bank of Hungary (NBH, the central bank) targets annual inflation of 2-4%. Despite a commodity price shock at the start of 2011, inflation decelerated to an annual average of 3.9% in that year, owing to weak domestic demand and high unemployment. We estimate that inflation rose to 5.7% in 2012, owing to value-added tax (VAT) and consumption tax increases in January, a new telecoms levy in June, and food price increases following bad harvests. Despite plans to reduce household electricity and gas prices by 10% from January 2013, new taxes on financial transactions will put upward pressure on prices in 2013, keeping inflation above the NBH's target band, at 4.5%. An expected gradual appreciation of the forint against the euro will help to contain inflation in the medium term. Domestic demand is expected to remain subdued amid fiscal consolidation and tight credit conditions. As a result, annual inflation is forecast to average 3.3% per year in 2014-17. However, any unexpected fiscal loosening or significant weakening of the currency would exert upward pressure on prices.

  EXCHANGE RATES: We expect the forint to appreciate gradually in nominal terms against the euro over the forecast period as implementation of fiscal reforms (and possible new IMF agreement) bolsters investor confidence, and as economic activity strengthens from 2014 onwards. The robust balance-of-payments position will also lend support to the currency in the near term. Nevertheless, the forint remains sensitive to shifts in global risk appetite--as shown by its 21% depreciation against the euro between mid-2011 and January 2012--and to any perception of fiscal slippage, given the country's high debt levels. The forint has fluctuated against the euro since the start of 2012, strengthening amid expectation of a new IMF financing deal and weakening in response to delays. Further delay in finalising the IMF deal and worsening of the euro zone debt crisis would increase downward pressure on the forint, owing to Hungary's extensive financial and trade linkages with the bloc.

  EXTERNAL SECTOR: The current account registered a surplus of 1.5% of GDP in 2011 as strong export growth led to large surpluses on the trade and services balances. Despite the recession curtailing domestic demand, we estimate that the current account slipped back into deficit in 2012. The current account is forecast to run expanding deficits until 2017 as income debits increase and improving domestic demand shrinks the trade surplus.

  January 01, 2013

• Forecast

  Hungary: Country forecast summary

  Country forecast overview: Highlights

  • The centre-right Fidesz-Hungarian Civic Union (Fidesz) has the strongest mandate of any government since the fall of communism. The opposition remains fragmented, limiting its ability to influence policymaking. Despite falling popularity and recession, Fidesz is likely to be re-elected in 2014, although it may need a coalition partner, which is likely to be the far-right nationalist Jobbik.
  • Fidesz has been forced to backtrack on several controversial laws in order to start talks on an EU-IMF bail-out needed to ensure debt sustainability and investor confidence. However, talks have failed to gain momentum, given the government's reluctance to accept oversight of fiscal policies.
  • The euro zone recession in 2012-13 will have a negative impact on growth. The Economist Intelligence Unit forecasts that the export-dependent economy will contract by 0.4% in 2013. Growth will return in 2014-17, averaging 2.7% a year, as new export capacity is put in place and domestic demand gradually recovers.
  • Hungary achieved a budget surplus in 2011 owing to the nationalisation of private pension assets. We expect partial implementation of Fidesz's five fiscal consolidation packages. This should be sufficient to bring the budget deficit below 3% of GDP in 2012. The deficit is forecast to widen to 4.2% of GDP by 2017, although a new IMF loan could impose stricter fiscal discipline.
  • Pro-government members of the National Bank of Hungary (NBH, the central bank) narrowly voted in favour of interest rate cuts in four rounds of monetary loosening instigated since August 2012. Annual inflation is estimated to have risen to 5.7% in 2012, owing to tax increases, a new telecommunications levy, and food price rises amid a bad harvest. We expect the pro-government members to push for further rate cuts.
  • The forint is forecast to appreciate gradually against the euro in 2013-17, but will remain susceptible to shifts in risk appetite, given the potential for fiscal slippage and the country's large debt burden. Euro zone accession will not occur during the forecast period, owing to difficulties in meeting the Maastricht criteria and the waning appeal of the euro, given the euro zone debt crisis.
  • Despite the recession curtailing domestic demand, we expect the current account to slip into deficit in 2012, owing to weak foreign investment inflows. The current account is forecast to run expanding deficits until 2017 as income debits increase and improving domestic demand shrinks the trade surplus.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	-1.4	-0.4	2.4	3.1	2.8	2.5
  Consumer price inflation (av; %)	5.7	4.5	3.6	3.4	3.3	3.0
  Consumer price inflation (year-end; %)	6.6	3.5	3.8	3.6	3.4	3.2
  Budget balance (% of GDP)	-2.9	-3.1	-3.4	-3.7	-3.9	-4.2
  Current-account balance (% of GDP)	-0.3	-2.0	-1.8	-2.4	-3.8	-5.3
  Short-term deposit rate (av; %)	6.2	5.4	4.9	4.4	4.2	4.0
  Exchange rate Ft:US$ (av)	226.1	207.8	210.3	214.1	209.8	208.7
  Exchange rate Ft:€ (av)	290.3	267.0	266.5	265.0	264.4	263.1

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  January 01, 2013

View detailed map

Country Briefing

Total area

93,030 sq km

Population

9,982,000 (October 2011 census)

Main towns

Population in '000, January 1st 2009 estimate

Budapest: 1,712

Debrecen: 206

Miskolc: 170

Szeged: 169

Pecs: 157

Gyor: 130

Nyiregyhaza: 118

Kecskemet: 111

Szekesfehervar: 102

Climate

Continental

Weather in Budapest (altitude 139 metres)

Hottest month, August, 17-28°C (average daily minimum and maximum); coldest month, January, minus 1-4°C; driest month, February, 22 mm average monthly rainfall; wettest month, June, 63 mm

Language

Magyar (Hungarian)

Weights and measures

Metric system. A cadastral yoke (1 acre = 0.7033 cadastral yokes) is used for measuring land

Currency

Forint (Ft)

Fiscal year

January 1st-December 31st

Time

One hour ahead of GMT

Public holidays

January 1st (New Year's Day), March 15th (anniversary of the 1848 uprising), April 1st (Easter Monday), May 1st (Labour Day), May 20th (Whit Monday), August 20th (National Day-Feast of St Stephen), October 23rd(Republic Day), November 1st (All Saints' Day), December 24th-26th (Christmas)

January 01, 2013