Unorthodoxy explained

Prime Minister Orbán took  his prime ministerial oath on the 10th of May and this event could be regarded as the birth of the third Orbán government. He and his Fidesz party promised to “carry on” (“folytatjuk!”) .  So what is it they’d carry on with, say, regarding the economy? Let’s recap what the “unorthodox policies” of the second Orbán government, which seems to result in Hungary’s well-visible economic recovery, actually meant.

When, despite all the economic success the first Orbán government achieved,  they were voted down by the Hungarian voters in 2002,  the  Socialist-left-liberal governments resorted to  accumulating foreign debt in order to manage the huge budget deficit problems their inappropriate economic policies caused.  So even though the first Orbán government decreased the dept-to-GDP ratio to 54% from around 65%, when  the international economic crisis broke out in 2008, the  Hungarian economy was already in a very weak position: the dept-to-GDP ratio was nearing 80% … and the  biggest part of this debt was foreign debt in foreign currencies.  Bankruptcy was imminent and taking out an IMF-EU loan was the only way to avoid it. Despite all the postcommunist/left-liberal propaganda, the truth is the terms of the loan were far from attractive: it came with thick neo-liberal strings attached: sell out your assets and tax people, not multinationals and banks.  Eventually when the second Orbán government took power in 2010, there was hardly  any economic elbowroom for them.  The IMF loan was a carefully set-up political booby-trap in essence.  If  Orbán had followed the IMF path then his political credibility would have evaporated in no time and the postcommunists would have returned yet again in a few years, just like the Communists returned as Socialists in 1994. Charging forward was the only way.  The actual budget deficit was more like 7% in 2010 instead of 4% what the Socialist Bajnai government put on paper.  Paper doesn’t blush…

It quickly became evident in 2010 that the  IMF and the EU  had no intention of renegotiating the terms of the loan their sidekicks  left behind and they demanded the usual austerity measures from Orbán they always do: tax hikes for people, cuts in benefits and public services, selling state assets.  Cutting links with the IMF was practically inevitable if Orbán wanted to go in a different direction.  He did so, accompanied with a political rhetoric of “economic freedom fight”.   The phrase “freedom fight” goes  down well with the Hungarian soul even if we’ve had many freedom fights and none of them were successful (at least directly).  Orbán bravely refused to accept the terms for  Hungary’s having the IMF safety net despite the huge political, and also economic, pressure put on him.  This policy alone made the already bad foreign press of Hungary even worse. We  became a “dictatorship” very quickly.

When Europe’s economic storm drastically worsened in 2011,  Orbán  bravely “pulled a Turkey”:  he invited the IMF back to the negotiating table… and he started playing for time just like Turkey did once.  He kept negotiation hopes alive for more than a year, making the markets believe that sooner or later Hungary would have the IMF safety net back.   In the meantime it became evident  that the IMF, certainly also because of  their political motives, was not willing to make concessions.  In fact,  they wanted to punish Hungary hard for  Orbán’s  policies, probably as a way of  deterring  other European countries from following similar policies.  During this economic storm EU/IMF had the prime ministers of Italy and Greece replaced with their stooges and by the end of 2011, the beginning of 2012 they tried to do the same thing in Hungary. That was when half a million Hungarians took to the streets of Budapest on the freezing cold day of the 23rd of January, 2012 and they said a big no to this attempt. Polls also showed Fidesz and Orbán had a strong enough political support, so he took the leap:  Hungary sent IMF home … and eventually paid the IMF loan back one year earlier  in order to send the message to the markets that Hungary had enough self-confidence to follow its own course.  The other very important milestone of success was when EU eventually, very reluctantly indeed, had to let Hungary out of  the Excessive Deficit Procedure in 2013. This further increased market confidence in Hungary.


Hungary’s budget deficit as a percentage of GDP


In order to balance the budget and to stop the increase of  public debt,  without resorting to “classic” austerity measures,  two major things were needed: taxing banks and multinational companies like the supermarket chains and effectively nationalizing the compulsory private pension funds.

It was beyond any doubt Orbán had the support of the Hungarian public for the former. There was/is public anger towards the banks because of the role they played in the economic crisis, especially because of all the hardship  the widespread foreign currency based mortgages caused for hundreds of thousands of people when the exchange rate of the Hungarian Forint plummeted during the crisis. People were also well aware that the banks had been heavily subsidized from taxpayers’ money before.  Let me note that eventually Orbán’s example of taxing the banks in order to manage the crisis was copied by a number of Western governments, even though the financial sector in Hungary was  hit harder this way than in other countries.  The stable and strong (supermajority in the Parliament!) political support, together with some domestic media support, allowed Orbán to push this unprecedented move through.  However Hungary’s press image in Europe and in the US  got even worse and darker. Hungary became a totalitarian dictatorship, a Nazi one. No doubt at all that the heavily taxed influential foreign financial institutions  played  their own important role in this process.

A Le Monde cartoon


The Hungarian Central Bank (MNB) was another important battlefield.  The bank chairman, András Simor, who was nominated and elected by the Socialist-left-liberal regime in 2007,  was a left-liberal and in fact he proved to be a real IMF stooge.  It turned out he supplied IMF with info, in a way which was bordering on crime, and most importantly and he and his men in the Monetary Council kept the base rate unreasonably high. The high base rate, not really justified by the inflation figures, resulted in very high interest payments on Hungary’s mounting debt and it was killing any kind of  chance for economic growth.   The government crossed with Simor and “the threatened independence of MNB” became a major worry  in the global (Western) media. In contrast, there was deep silence in the very same newspapers  when the Dutch prime minister directly intervened who the central bank chairman should be…

The chart also shows when Simor left office: that’s when the base rate started decreasing in 2013.


What was the story with  the private pension system?  The left-liberal Horn government introduced a two-pillar pension system in 1997.  Later the voluntary private pension funds made this a three-pillar system.  They kept the old state pension system, inherited from the pre-1990 Communist regime, for the elderly generation and they introduced a new private ‘pillar’  . The younger generations were forced to join these private pension funds. Practically the state created a guaranteed clientele for private businesses and the Hungarian state administration also collected pension contributions for these .  These pension contributions, of course, were missing from the state pension fund and that made a bigger and bigger hole in the state finances in each year… This was “plugged in” by more debt, “of course”… You get the idea.   Besides these obligatory private pension funds were ripe with corruption.  Their boards were filled with left-lib cronies, e.g. trade union leaders.  These mandatory private pension funds charged ridiculously high handling fees (like 5% per year!) and they produced  poor returns for the members.  No wonder they were quite unpopular with the public and the Orbán government could easily get hold of their assets.  The government payed out the individual members but they took over the capital in these funds and then they used it mostly to balance the state budget.  Note that the voluntary private pension funds were left alone.

Introducing a flat tax regime in order to encourage economic growth was another important element of the “unorthodoxy”.   A flat income tax may sound very unjust but  consider the huge tax breaks families were given and you’ll see that the goal is to strengthen Hungary’s weak middle class.  Making the middle class stronger, besides the obvious social-political benefits, then helps internal market demand increase, that is it stimulates economic growth.

Another major policy was what the British government later  put as “no more something for nothing”.  The Orbán government has been providing hundreds of thousands of people, who used to be on benefits, with “public work”.  Though this drove unemployment down and increased economic activity, it even must have increased consumption to some extent, but the most important goals may not be economic ones.
I must also mention “rezsicsökkentés” (cutting the costs of household services) which proved to be a very popular, possibly election-winning, measure.  The government made the costs of household services, including electricity, water, gas and other public services decrease by 20 percents or so by law.  Utility bills were relatively high in Hungary by European standards and most of the utility providers are again foreign owned.  The measure also reduced the inflation rate very significantly and eventually we saw something unprecedented in Hungary: the yearly inflation was minus 0.1% in March.

Orbán made his confidante, his economy minister,  György Matolcsy the central banker after  the office term of  left-lib IMF stooge András Simor was up.  It’s difficult to say how much of the above things could be attributed to Matolcsy but possibly most of them.  He and his men in the Monetary Council slowly cut the base rate to historic lows, and that obviously growth-friendly, while Hungary managed to keep the financial balance.   The budget deficit has been below the Maastricht criteria of 3 percents since 2011.  The Hungarian Forint exchange rate  fluctuated a lot but eventually Forint didn’t weaken too much. The weaker Forint boosted exports and hindered imports.  Hungary has a very high balance of trade now and that is going to strengthen Forint sooner or later.   Despite the low base rate, the yield of Hungary’s 10-year T-bill has sunken to 5.1%.  (In comparison that was 12.2% in the March of 2009!)

Matolcsy, as a bank chairman, also initiated a “Lending for Growth” programme: the central bank lends money at zero percent to banks for specific purposes, like SME-financing or reducing exposure to foreign currency loans, and the banks are allowed to charge only  2.5% at most.  His latest move is that the 2-week T-bills are to be converted into bank deposits and foreign banks and funds will be barred from having their money parked in MNB.  This effectively pumps liquidity into the economy.  Another strategic direction to strengthen the economy is a strong push to convert foreign currency public debt into Forint debt.


It’s time I finished this post. Please feel free to comment if you  have questions or you want to know more.


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Economic recovery IS on the way

Quite a few economic indicator figures  have been released this morning.


The European Commission has published their economic forecast.  They predict Hungary’s GDP would grow by 2.3% (up from their estimate 2.1% in February), the budget deficit would stay below the Maastricht-criteria three percent limit and Hungary’s yearly inflation rate  would be only 1 percent.

Hungary’s KSH (Hungarian Central Statistical Office) has published data about  foreign trade  and the number new properties built.

  • Exports increased by 7.1%, imports grew by 5.7%  in the first two months of  2014 (year-on-year). The balance of trade surplus was 321 million EURs more and it grew to 1.242 billion EURs. Vow!
  • 51% more properties were built in Hungary in the first three months of 2014 than a year earlier!

Besides the Association of Logistics, Purchasing and Inventory Management (Halpim) has announced that Hungary’s seasonally-adjusted Purchasing Managers Index (PMI)  climbed to 54.6 points in April from 53.7 points in March, indicating further growth.  (50-plus points means growth.)

By the way, last week  Hungary’s National Bank announced that they will  convert their two-week bill facility into a deposit instrument with the same maturity from August.  The facility, the basis of the country’s benchmark interest rate, will no longer be accepted as collateral by the bank and foreign investors will be barred from it.  This is a  very significant measure  indeed to  encourage a further shift towards financing Hungary from domestic, Forint-based sources instead of foreign currency based sources and to reduce the country’s external vulnerability.  As a reminder, Japan’s GDP-to-public debt ration is 220+% and that’s possible only because Japan owes their debt to its own citizens and companies, not to foreign ones.


Update on the 6th of May:     KSH has announced retail sales have increased by 8.3% year-on-year in March, after 6.7% y-on-y in February.



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Historic low base rate again

Hungary’s central bank  (MNB) cut the base rate by 15 basis points to an all-time low of 2.70% yesterday.  This was quite unexpected since nearly every economic analyst  had thought the reduction would be 10 bp and nobody predicted a 15 bp cut. 

Base rate in Hungary

The Hungarian Forint  went to 310.5 HUF/EUR after the announcement and today it has depreciated further.


Economy Minister Mihály Varga said before the decision yesterday that  he “trusts the MNB will act responsibly in view of the current situation ” (that is the weak level Forint is at)   He added that “we’re in the 310 HUF band now despite Hungary’s good and stable economic fundamentals and an external market shock may send the forint in the 320 or 330 band, though this would mean business as usual at least domestically “.

A lower base rate is certainly good for Hungary’s economic recovery and for increasing exports, besides it also  reduces Hungary’s debt payment burden, but (mainly because of the very high FX loan exposure Hungarian households have) it carries a lot of risk, too.  I keep my fingers crossed since our central bank now is skating on thin ice.

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Economic Sentiment Two

The central banks of Turkey, South Africa and India caved in and they increased their base rates after the Turkish Lira, the South African Rand and the Indian Rupee were smoked in the financial markets. Now the Hungarian Forint is under a strong attack, too.

The exchange rate of the Hungarian Forint against the Euro

The big difference to these countries is that Hungary has a massive trade balance surplus.  Besides the budget deficit is under 3 percents and the economic growth is accelerating, the inflation is low (under 1%). The debt-to-GDP ratio is still high (80%) but at least it’s not growing anymore.

In fact the trade balance surplus of Hungary, which in principle should matter most in determining the exchange rate,  in last November has turned out to be more than expected, it was 825 million Euros instead of 804 millions. The surplus was  almost 7 billion Euros in the first 11 months  which is half a billion Euros more than it was in the first 11 months of the previous year. That’s big for a country like Hungary. So what’s cooking?

Let me quote this comment on Business Insider because I think it sums the situation  up very well indeed:

If tapering of 10-20 billion has this kind of effect on these small countries currency then why didn’t we see the opposite when QE was announced?

This is economic warfare pure and simple. Why any of these countries  should have their currencies move this violently makes no sense. Their share of exports to the US can’t be that high. The US wants the world to say go ahead, keep print and living above your means. The Truth is that this will shorten the life of the dollar as a reserve currency. People around the world will band together against us.

We should be cutting gov’t spending and we should have reduced taxes over the last five years, but that would have only benefited the American people and let the gov’t feel the pain. We can’t have that now can we.

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