IMF Deal Won't Cure Fidesz Ills


BMI View: After months of heated negotiations, Hungary is on course to secure an IMF/EU financial backstop by early Q412, which will help to provide much-needed stability for financial markets. However, this alone will not bring about an immediate end to Hungary's current economic woes, and as a result, we expect public support for the ruling Fidesz government to continue weakening. While the political opposition remains fragmented, growing levels of discontent and political apathy with the established parties could yet trigger a shift towards extremist parties.

Hungary continues to move closer, albeit gradually, towards securing a new external financing agreement with the IMF and EU. Having originally requested financial aid back in late November 2011, there have been sizeable disagreements between the two sides over Hungary's fiscal sustainability, as well as previous legislation passed by the government which has been deemed an abuse of political power. With all three credit rating agencies cutting Hungary's government debt to junk in 2011, and financial pressures building in the eurozone, it has long been our view that Hungary has no option but to eventually concede to IMF and EU demands given that it would otherwise struggle to regain market confidence.

This view has played out, with the Hungarian government drafting a more austere budget for both 2012 and 2013 in order to meet the EU's 3.0% of GDP deficit target limit, despite the domestic economy already contracting again. Moreover, Hungary has heavily revised a previous central bank law, which had proven a significant barrier to talks with the EU Commission, which has recently been accepted by both the IMF and the ECB. With Hungary's parliament set to vote on this law in mid-July, there is increasing scope for official negotiations between Hungary, the IMF and the EU to commence within the next month or so, paving the way for a deal by early Q412.

While this will provide a fillip to Hungarian financial markets (see our online service, June 28, 'Asset Class Strategy: CDS Primed For Major Retracement'), we stress that it will do little for the country's ailing domestic economy, underpinning our view that any IMF/EU deal will not be viewed as a political success for the Fidesz administration by the domestic population. Indeed, the economy contracted by 1.8% in quarter-on-quarter (q-o-q) terms in the first quarter of 2012, unemployment remains well above the 10% level (see chart below), inflation is riding high (5.3% y-o-y in May) on the back of higher taxes and elevated energy costs, and the government is implementing even tighter fiscal policy on the back of IMF/EU demands. As a result, we forecast the economy to contract by 1.2% in 2012 and households and corporates are unlikely to enjoy a meaningful economic recovery until 2014 at the earliest.

No Fillip From IMF Deal Expected
Hungary - Leading Indicator Data

As it stands the Fidesz administration finds itself in a lose-lose situation. By giving in to external demands the Fidesz administration is reversing course on many of the policies it has staked its political agenda on, but if it attempts to go it alone without financial assistance, economic conditions at home would most likely end up deteriorating further, potentially limiting any leverage with the IMF and EU it currently has when it is forced back to the negotiating table.

Rising public discontent with Fidesz's handling of the country's economic crisis has been evident in recent polling data. According to Median polling agency, the ruling administration's public support has fallen to 22% in May 2012, down from 35% (see chart below). In line with our previous view, Fidesz still remains the most popular political party in Hungary, and this is partly due to the lack of a coordinated and well-organised opposition, but also due to the socialist MSZP's legacy of steering Hungary into economic crisis back in 2007.

Rising Apathy Could Embolden Extremist Parties
Hungary - Polling Data, Median - Support For Main Political Parties

Rising discontent has in turn led to increasing voter uncertainty and apathy. The percentage of undecided voters has increased from 33% back in October 2011 to 43% as of May 2012. While there is certainly potential for these voters to flock back towards Fidesz once some degree of recovery is felt in 2013 (helping the party to secure another victory in parliamentary elections due in 2014), we also see room for a shift towards more extremist parties, such as the far-right Jobbik party. Jobbik has already seen its support move into double-digit territory according to Median polling data, and while it is unlikely to become a mainstream political force in Hungary, we reiterate that there is potential for them to eat away at Fidesz's support enough to position themselves as a possible coalition partner come the next round of parliamentary elections. This could serve to damage relations both with the EU as well as foreign investors.

Table: Political Overview
Source: BMI, CIA Factbook
System of Government Parliamentary Democracy, Universal Suffrage: Unicameral 386-Seat National Assembly (Four Year Term). Executive Power rests with the prime minister.
Head of State President Pal Schmidt, 5-year term
Head of Government Prime Minister Viktor Orban
Last Election Parliamentary - April 11, 2010 (First Round), April 25, 2006 (Second Round)
Presidential - N/A, chosen by National Assembly
Composition Of Current Government Centre-right government led by Fidesz party.
Key Figures Deputy Prime Minister - Zsolt Semjén, Foreign Affairs - János Martonyi, Economy - György Matolcsy
Governor of the National Bank of Hungary - Andras Simor
Main Political Parties (number of seats in parliament) Fidesz, Hungarian Civic Union (263 seats): Centre-right, conservative Christian democratic party. The largest opposition party, it is led by Victor Orban.
Hungarian Socialist Party (MSZP) (59 seats): Descendant of the Hungarian Socialist Worker's Party, which controlled the country during the communist era from 1956-1989. Since then, the party has transitioned to a leftist social democratic party in favour of European Union reforms and eventually joining the euro.
Jobbik - The Movement For A Better Hungary (47 seats): Right nationalist party.
Politics Can Be Different (LMP) (16 seats): Green/Liberal Political Party
Extra-Parliamentary Opposition? No major non-parliamentary opposition groups.
Next Election Parliamentary - April - 2014
Presidential - June - 2015
Ongoing Disputes No territorial disputes with neighbours.
Key Relations/ Treaties Member of the European Union and NATO.
BMI Short-Term Political Risk Rating 66.88
BMI Structural Political Risk Rating 75.64
This article is tagged to:
Sector: Country Risk
Geography: Hungary