Historically, culturally, linguistically, even financially and economically, Hungary has always been an outlier. It was the least likely CEE state to be drawn into Russia’s orbit after World War Two, and the first to rebel against Muscovite rule. Though many link the fall of the Berlin Wall to the collapse of the Soviet Union, the first cracks in the communist edifice appeared in June 1989, when Hungary opened its border with Austria.
In the 1990s, Hungary became a vociferous advocate of free trade. German carmakers rushed in to set up production units, while local banks were sold to lenders from the likes of Belgium, Italy and Austria. Even now, notes Julia Kiraly, a former deputy governor of financial stability at Hungary’s central bank, the MNB, the country “remains the region’s most open economy”.
To the casual observer, that may come as something of a surprise. Under Viktor Orban, who has led the country since 2010, Hungary has again demonstrated a willingness to tread its own path. The prime minister’s second election victory (he was also prime minister between 1998 and 2002) was a classic cry of frustration from a disenfranchised electorate sick of the country’s dire economic climate. At the start of the decade, four million Hungarians out of a population of 10 million lived in poverty, while more than 12% of working-age adults were unemployed.
The prime minister railed against his predecessors, focusing on the decision, at the height of 1990s free-market fervour, to sell valuable state assets to foreign investors in sectors ranging from telecoms to banking to utilities, often at knock-down prices. In 2015, the state paid $700m to wrest back control of Budapest Bank from GE Capital. MKB Bank was bought from Munich-based Bayerische Landesbank, nationalised, and then re-sold to Hungarian investors.
A year later, the government joined forced with the EBRD, each buying 15% of the local operations of Austria’s Erste Group, thereby cutting the share of the banking sector controlled by foreign lenders to “around 45%, from 70%-80% a decade ago”, reckons Gunter Deuber, head of economics, fixed income and foreign exchange research at Raiffeisen Bank International (RBI),
Orban’s policies, many of them drawn up by MNB governor Gyorgy Matolcsy, went thoroughly against the grain of mainstream European thinking. They even garnered their own term: Orbanomics. Punitive new levies were imposed on local and foreign banks, while lenders were also forced to swallow losses by converting foreign exchange loans back into Hungarian forints at artificial rates. To cut yawning levels of national debt, citizens were forced to transfer 75% of any privately held pension into the public pot. Anyone who refused to do so, was denied a state pension.
Debt, deficit reduced
Officials from Strasbourg to Frankfurt to Brussels waited for Orbanomics to fail openly and painfully or, at the very least, to die quietly, behind closed doors. Yet it did not. Government debt as a share of GDP, which stood at a shade under 70% at the end of 2017, according to IMF data, may be high by regional standards, but it has fallen by 10 percentage points since the start of the decade.
Under Orban, Hungary’s budget deficit has been halved, while growth rates have quadrupled. Wages have risen strongly, to the point where rising prices are a concern: core inflation rose by 3.8% year-on-year in March 2019, according to data from the Central Statistical Office, the highest reading since December 2012.
The country’s credit ratings meanwhile have steadily improved. Moody’s Investors Service, which rates the sovereign Baa3 with a stable outlook, said in a December 2018 research note that policies designed to cut government debt and to keep the budget deficit below 3% of GDP, had “increased the sovereign’s ability to withstand external shocks.”
Growth looks set to remain robust through 2019 and 2020. Zoltán Kovács, the state secretary for international communications, told GlobalMarkets that 2018 had been “an especially good year with GDP growth of 4.8%”. He added: “The government is working to maintain this high growth rate. Provided the economy continues to perform this well and the debt ratio is reduced further, upcoming ratings are also set to improve.”
Hungary continues to confound in other ways. Kiraly, the former MNB official, notes that the economic cycle appears for now to have parted ways with Germany. “In the past, when Germany did well, so did we, and when it was in recession, so were we. This time, that isn’t the case.” In March, Germany’s Ifo Institute tipped output in Europe’s largest economy to expand by 0.6% in 2019, against an earlier forecast of 1.1%, due to weaker foreign demand for industrial goods and stronger headwinds for exporters.
KIraly also points to the fact that exports, the key long-standing driver of domestic growth, had been replaced by internal demand. Retail sales jumped 8.4% year-on-year in February 2019, driven, says Peter Virovacz, ING’s senior Hungary economist, by double-digit wage growth and a vibrant real estate sector.
A strong and steady flow of capital from Brussels to Budapest also helps. The EU spent €4.05bn ($4.5bn) in Hungary in 2018, much of which is channelled into road building and environmental projects. Total EU spending as a share of Hungarian gross national income in 2018 was 3.43%. Romania aside, no other member state benefits more, on a relative basis, from European largesse.
This matters, if only because, on the surface at least, Brussels and Budapest have been engaged for years in an increasingly incendiary war of words. Orban has accused European Commission president Jean-Claude Juncker (a man who once referred to the Hungarian prime minister as a “dictator”) of plotting to impose mandatory migrant quotas on member states, Hungary included.
EU frets, investors invest
In March 2019, Orban’s ruling Fidesz party was suspended from the European People’s Party, an alliance of centre-right political groups, of which Juncker is also a member. And in September 2018, the European parliament said the Hungarian government posed a “systematic threat” to democracy and the rule of law, but stopped short of imposing sanctions or suspending its federal voting rights.
European officials wring their hands, fretful that Orban’s stated desire to build an “illiberal state” run according to Hungarian rules and needs, will be copied and emulated across central and eastern Europe. Hungary’s decision in 2015, at the height of the migrant crisis, to build a wall along its border with Serbia, was widely castigated in Western circles.
Yet political bickering has been almost wholly ignored by corporate and portfolio investors. Inward FDI hit $3.8bn in 2018 according to data from Unctad, scattered across 98 greenfield projects, up from $2.5bn and 83 projects the previous year. Most of the capital, notes international communications secretary Kovács, came from US and German corporates. Adds Marek Drimal, an EMEA strategist at Société Générale in London: “In recent years, a lot of foreign capital has been put to work in the automotive sector, and across oil and gas and construction.”
If anything, Hungary’s economy is these days even more deeply embedded in the single market. “There has been noise about Hungary, but most of the big Western investors in the FDI space remain committed” to the country, says Raiffeisen Bank’s Deuber. “Big companies, when they invest heavily in a country, don’t leave quickly.” He adds that the Hungarian premier has played a canny hand with foreign investors. “Orban has been wise, keeping very close contact with the business community, particularly the big manufacturers.”
It is worth revisiting for a moment the underlying tenets of so-called Orbanism. Its mere existence and its acceptance, in investment, banking and policy-making circles across Europe, suggest that Hungary’s prime minister and his inner circle have, either by accident or design, chanced upon a new and effective economic model. Mention of the term usually requires the commentator to remind the reader, either with approval or with a sneer, that Orbanism refuses to cleave to the rules of contemporary economic orthodoxy.
But is this fair? While some aspects of Hungary’s model are indeed unorthodox, “many others fit neatly and simply into the mainstream global economic discussion”, says Raiffeisen Bank’s Deuber. “Yes, the government is pushing for low rates and cheap financing conditions, but you see that elsewhere in Europe too.”
It can also be argued that Hungary, often by pure accident, regularly manages to be ahead of the curve. Its decision to put a sizeable chunk of the banking sector back in domestic hands went against prevailing wisdom and could have been handled with greater care. But protectionism is now back in vogue across the continent. France’s president Emmanuel Macron, a self-styled liberal, is retreating into the past, directing state aid into the maw of national and continental champions, with the aim of competing with China and the United States. The same shift is taking place in the likes of Germany and the Netherlands.
As for barrier-building, it is easy to overlook the fact that seven of the EU’s 28 member states, including Spain and Latvia, have built new walls or reinforced existing national boundaries since 2015. The Transnational Institute, a Netherlands-based think tank, reckons EU countries have built more than 1,000km of border walls since 1989.
Hungary’s influence is also visible in the strict taxes (long since eased) that it imposed on locally licensed lenders in 2010. Austria imposed a similar levy on its own banks the following year, and Romania is in the final throes of introducing a tax on banks’ financial assets, based on market share. Orban’s more autocratic tendencies, and his willingness to stir the pot to heat up his political base, has found favour in Poland, where the ruling Law and Justice Party has assumed political control over state-funded radio and television. But there is as yet little sign of his illiberalism spreading across the rest of the region.
One final issue needs to be addressed. By any measure, Hungary’s economy has outperformed this decade. Foreign capital continues to flow in, and to be eagerly put to good and productive use. But will the tenets of Orbanism prevail? How sturdy, really, are its economic foundations?
In its latest World Economic Outlook, published in April, the IMF tipped output to expand by 3.6% in 2019 and by 2.7% in 2020 — a slower rate of growth than Bulgaria, Serbia, Poland and Romania. In its latest CEE Quarterly, published in March 2019, Italian lender UniCredit warned that the “honeymoon was over” for an economy whose “best year’s of economic growth” were now behind it. It is also worth noting that while an unbending approach to immigration has been a vote-winner, it has produced some unpleasant side effects. “Because the labour force is not expanding, there is a huge upward pressure on wage growth,” notes SocGen’s Drimal.
And while Orban’s workfare programme, introduced in the dark days of 2010, has provided employment for hundreds of thousands of jobseekers, most of the work is menial and transient. While the official jobless rate at the end of January 2019 was 3.5%, according to data from Eurostat, most economists put the real rate at 7%-8%. “The cities are doing fine, but in the east of the country there is a big and hidden unemployment problem,” says Kiraly. “The country is being torn into two parts. What looks healthy and positive is not real. It’s simply a disguise.”