Hungary: The Government Seeks to Strengthen Its Position Before Key Elections

7 MINS READNov 8, 2013 | 11:02 GMT
Hungary: Government Seeks To Strengthen Its Position Before Key Elections
Hungarian Prime Minister Viktor Orban delivers a speech at Heroes square, Budapest, Oct. 23.

As Hungary gets ready for its spring 2014 general elections, the government of Prime Minister Viktor Orban is preparing with some controversial measures. On Nov. 5, the Hungarian parliament approved a new relief package for debtors with foreign-denominated mortgages, and on Nov. 6 Orban urged Hungarians living abroad to use their recently acquired voting rights in the upcoming elections, which will be held in April or May.

With a divided opposition and projections for modest economic growth in 2014, Orban's Fidesz party is likely to perform well. However, Budapest's relief measures are expensive and will likely strain Hungary's finances and create additional tensions with foreign companies and the European Union.

Since coming to power in late 2010, the ruling Fidesz party has used its two-thirds control of the seats in the Hungarian parliament to extend state intervention in the Hungarian economy. Orban was one of the first European leaders to understand that the geopolitical environment was changing in the region. In the context of a fragmenting European Union and a relatively powerful Russia, Orban believed the Hungarian central government should be strengthened in order to protect Hungary's national sovereignty. Most of Orban's controversial policies — including the nationalization of private pensions, attempts to neutralize the judicial branch, and the ongoing nationalization of strategic energy assets — are part of this strategy.

The global financial crisis greatly affected Hungary's banking sector. Prior to the crash in 2008, it was popular among Hungarian households and companies to take out foreign currency-denominated loans, mainly in Swiss francs and euros. However, the global and ongoing European crisis weakened the forint as well as the ability of Hungarian households to honor their debts.

Hungary: The Government Seeks To Strengthen Its Position Before Key Elections

Hungary: Non-Performing Household Loans

In 2011, the Hungarian government imposed a fixed exchange rate (considered unfavorable to the banks) at which certain foreign currency-denominated loans could be repaid. But the measures, which are estimated to have cost the banks $1.7 billion, have not significantly improved the situation of households and companies. As in a number of other European countries such as Spain and Greece, the rate of non-performing loans in Hungary has been on the rise. Hungary has around $18 billion outstanding in foreign currency-denominated loans. Around 20 percent of these loans, corresponding to about 3 percent of Hungary's gross domestic product, are overdue by more than 90 days.

During the summer, Budapest gave banks until November to come up with a solution to the problem, threatening to implement its own solutions if the proposal was not good enough. On Nov. 5, Fidesz decided to extend the existing exchange rate program by introducing two changes. The first extended the program to all debtors (in the original program, only debtors whose repayments were not more than 90 days overdue could benefit from the debt relief package). The second change was Budapest's implementation of an eviction moratorium until April 30.

The Fidesz proposal was less drastic than banks initially feared — there were rumors of a massive conversion of all loans to forints, or the application of a more disadvantageous conversion rate — partly because legal matters first have to be clarified before a more comprehensive plan can be put forward. The Constitutional Court of Hungary is currently analyzing the legality of foreign-denominated loans. Budapest expects that a ruling by the court saying that foreign-denominated loans are illegal would give the government a strong legal basis for the massive conversion of such loans into forints.

This toned-down plan also shows that the government is not interested in inflicting excessive pain on the banks, given the delicate financial environment in Europe. Despite their constant rhetorical clashes with Fidesz, the banks themselves are interested to a certain extent in collaborating with the government. Considering the high rate of non-performing loans that are piling up across the banks' balance sheets, it seems sensible to make repayment of loans easier, even if this means taking losses.

In this context, the current plan for solving Hungary's banking problems may prove insufficient. Even if the plan is extended to include people with payments overdue by more than 90 days, it is unlikely that the program will substantially improve these debtors' ability to pay. Even before the Nov. 5 announcements, banks were offering softer conditions to consumers. Moreover, the eviction moratorium and the promise of additional relief measures also increase the likelihood that people will wait for further announcements before deciding how to deal with their debts. As a result, the program that was announced Nov. 5 is unlikely to be the final comment on the issue.

The Race Begins 

Budapest's efforts to solve its banking problems are also connected to the upcoming elections. Fidesz is still the most popular party in Hungary, with opinion polls gauging its approval at around 30 percent, twice as high as support for the Hungarian Socialist Party (14 percent). However, opinion polls also reveal that roughly four in 10 Hungarians are still undecided on a candidate to vote for, which means that the outcome of the 2014 elections is far from clear. While Fidesz will likely gain the most seats in the elections, a key question will be whether it can repeat its landslide performance of 2011, which resulted in control of two-thirds of the parliament, and thus the power to amend the constitution.

In recent months, Orban has strengthened his efforts to attract voters. In August, Budapest announced a pay raise for teachers, and in September it raised the pay for workers in the healthcare sector. On Nov. 5, State Secretary for Employment Sandor Czomba said that the government has started negotiations with employers and employee associations to increase the minimum wage, which is currently at 332 euros per month.

In January, the government cut utility prices by 10 percent, with a further cut taking effect this month. More recently, Orban said that in 2014 there would be "a fight for Hungary's utilities," suggesting that some companies would be nationalized. As with the banking sector, these measures have put and will put pressure on foreign companies, such as Germany's RWE and E.On, in particular. Utility companies in Hungary are already largely not profitable and considering giving up their Hungarian operations. In the coming months, Budapest is likely to keep pushing for lower utility prices along with the nationalization of some strategic companies.

Orban has also been flirting with the Hungarian diaspora. After winning the elections in 2010, he gave voting rights to Hungarians living abroad (including the significant Hungarian minorities in Romania, Slovakia and Serbia). Around half a million people have applied for Hungarian citizenship since then. However, according to the Hungarian National Election Office, only 50,000 of them have signed up for the 2014 elections so far.

Fidesz will also benefit from a fragmented opposition. Center-left parties, including the Hungarian Socialist Party, E14-PM and the Democratic Coalition, are struggling to create a joint anti-government front. Their failure to agree on a common agenda is lowering their chances of forming a common list for the 2014 elections. The far right is having similar problems. In early October, former members of the nationalist Jobbik party announced the creation of Hungarian Dawn, which is inspired by Greece's Golden Dawn party and pursues a more radicalized line than Jobbik does. As a result of these divisions, the Hungarian far right could be more fragmented in 2014.

Populism Is Expensive

According to the European Union's autumn forecast, the Hungarian economy will grow by 0.7 percent in 2014. This is close to Budapest's forecast of 0.9 percent but below the projected growth for Central and Eastern European countries such as Poland, Romania and Slovakia. A key element to watch next year will be Hungary's deficit. According to the European Union, the deficit will reach 3 percent of gross domestic product in 2014, which is in line with EU limits but above the previous deficit of 2 percent reached in 2012.

Measures such as the extension of family benefits, salary increases in the public sector and programs to support indebted households will put additional pressure on Budapest's budget, exacerbating Hungary's need for cash. Additionally, these measures could increase tensions between Budapest and Brussels, as the Hungarian government seeks to protect its prerogatives against the process of supranational integration at the EU level. In this context, further measures designed to expand the central government's grip on the Hungarian economy are expected. Fidesz, in all likelihood, considers a strong Hungarian state crucial for the country to deal with its geopolitical challenges.

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