The following post on the Hungarian economy is the first part of an article written by “one of us.” Those who follow the discussions on Hungarian Spectrum are familiar with “Observer.” I am pleased to publish his study because I’m a history and politics buff who knows little about economics, although we all know James Carville’s quip, “It’s the economy, stupid.”
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This is the time when a flurry of financial data, analysis and reports sum up the economic performance of the year past. The Eurostat figures and the “all-great” propaganda of the Hungarian government are all available to the readers.
However, knowing that the Hungarian quasi-dictator has been proven to lie, distort and manipulate on a regular basis, and that his regime has put together and then more than doubled the budget of a huge propaganda machine to do the same, I wonder why would the economic data be an exception from manipulation, distortion and cheating; memento Greece.
The frequent changes in the ways of reporting already indicate manipulation; see the abolishment of poverty data reporting or of weekly figures on national debt, etc. Seeing many doubtful elements or even bald faced lies, I have attempted some critical analyses of the official data.
I’ll pass over the recent Moody’s and Standard & Poor’s reports since they focus on the sovereign debt position, while the subject here is the Hungarian real economy.
1. More relevant documents are the EU Council Recommendation on the 2015 National Reform Programme of Hungary and the European Commission Country Report Hungary 2016, parts of which will be critically discussed.
Some of the above mentioned doubtful elements or obscure factors have been noted in the Council Recommendation as “risks” in the areas of: public finances; financial sector; taxation; labour market; education:
To improve its economic performance the Government was urged to take measures to restore normal lending to the real economy and remove obstacles to market-based portfolio cleaning; considerably reduce the contingent liability risks linked to increased state ownership in the banking sector. … Reduce distortive sector-specific taxes; remove the unjustified entry barriers in the service sector, including in the retail sector; reduce the tax wedge for low-income earners, including by shifting taxation to areas less distortive to growth; continue to fight tax evasion, reduce compliance costs and improve the efficiency of tax collection. Strengthen structures in public procurement that promote competition and transparency and further improve the anti-corruption framework. … Reorient the budget resources allocated to the public work scheme to active labour market measures to foster integration in to the primary labour market; and improve the adequacy and coverage of social assistance and unemployment benefits
Quite a handful of “risks” blotting the bright picture painted by the government propaganda.
Looking back at the year 2015 the overall lukewarm positive (or polite) the Country Report finds things haven’t changed very much because:
the Council is [still] of the opinion that there is a risk that Hungary will not comply with the provisions of the Stability and Growth Pact. Over the last year, Hungary has repeatedly extended its direct ownership in the banking sector [contrary to the EU recommendation]. State intervention in the banking sector, carried out via increased direct ownership, may entail significant fiscal risks.
The Commission’s Annual Growth Survey of November 2015 notes that although “Hungary is on a balanced, albeit still relatively moderate growth path, … Hungary’s rate of potential growth remains a full percentage point lower than before the crisis, which was already comparatively low.”
2. The 2.9% GDP growth for 2015 looks moderately good until we take into consideration the turbo charged absorption of EU Cohesion funds, included in this growth figure.
In his presentation in February Mr. István Csillag, former Minister for the Economy, showed that the 2.9% growth was achieved with 6-6.5% of GDP additional outlays (többlet kiadás), the 2014’s 3.7% growth with 8%. The net results are very negative: -3.3% for 2015 and a whopping – 4.3% for 2014, both well above the 2004 record difference of -2.2%.
So what is the real growth figure?
Contrary to the “performing better” propaganda his figure doesn’t compare well either: the Hungarian GDP growth – bottom red line, is well below the V4 + Romania in the 2010-2014 period, as Mr. Csillag showed.
Disputed is the government’s bluff regarding their “achievement of putting the economy on the path of sustained growth”, because the structural weaknesses of the Hungarian economy remain, e.g. its heavily reliance on the German automakers, as confirmed by the Country Report.
The 2014-15 decent growth figures were the results of the high demand for German cars, the EU cohesion funds and a good year for the agriculture. Nothing else grew or developed, to my knowledge, leaving the Hungarian economy vulnerable and pretty off the path of sustained growth. A glaring indicator of the above is the January 2016 20% y/y drop in construction as the respective cohesion funds abated.
3. All economists have been warning about the low rate of investment, which limits the growth opportunities. Hungary’s rate sank to the critical 16-17% of GDP, which is at about or below replacement rate, and which became the worst V4 one in 2014.
The considerable investment growth experienced in 2013-2014 came to a halt last year  and is projected to turn into a slight decline this year as EU-funded investment temporarily subsides. Corporate lending continued to decline despite several policy initiatives of the central bank to promote SME lending and the trend of private investment recently turned negative again. Private investment is hampered by a still cautious credit environment, a relatively high country risk premium that keeps funding costs high, and an unstable regulatory and tax environment. These factors particularly hinder foreign direct investment
somewhat gloomily notes the Country Report Hungary 2016.
This chart confirms the above:
I abstain from commenting on the conversion of the household foreign currency denominated loans which eliminated one of the largest systemic risks, as it involved HNBank operations and reserves which I don’t understand well.
However, the problem of low private lending persisted after the conversion and the reduction of this debt “from its peak of 117% of GDP in 2009 to 91% by 2014” and despite two lending stimuli programs initiated by the HNB. While in 2015 ”lending to households showed signs of recovery, … a similar turnaround in corporate lending has yet to take place,” concluded the Country Report.
4. PM Orban personally declared war on the public/government gross debt (GGD) in 2011 as “enemy #1”, spoke about reducing it to under 50% and started publicizing “success” figures.
The accompanying vilification of the Gyurcsány/Bajnai governments for “indebting the country” was grossly misleading – the GGD in the last pre-crisis year 2007 was 65.6% GDP, peaking at 80.8 in 2011, the second year of Orban’s government.
First of all one has to consider the reality of substantially reducing the GGD with 1% GDP average growth in an already heavily taxed and not very wealthy country.
To come closer to this utterly unrealistic goal, the Orbán regime appropriated accumulated private pension funds (PPF) worth HUF 3 000 billion at the end of 2011. Since the promised carrying over of the individual pension accounts never materialized, the funds ended in the budget. Arguably half of these funds or HUF 1 500 billion were spent on budget items in 2011-12. The move amounted to another loan, which practically increased the existing HUF 22 – 23 000 billion GGD by 6.5% in one hit.
The appropriation was carried out with some appalling hypocrisy about “protecting people’s savings” against speculators and threatening the victims with government pension exclusion, which was obviously illegal, which points to the absolutely offhand attitude of the regime even to its own commitments.
With the “protected peoples’ savings” the government acquired HUF 500 bil. worth of MOL (Hungarian Oil Co) shares at HUF 23 000 trading at 13-14 000 at present. Another scandalous example of bald faced lies turned government policies.
The confiscation of the pension funds helped bring the GGD figure down only to 78.3% GDP in 2012, in September 2013 it was still HUF 23 088 bil. or 80.2%, just as in 2010.
Facing embarrassment over the feeble results, the regime resorted to favorite weapons – cheating & deceit – the only official figure of the GGD issued and used by the government is the “as of December 30”, e.g. this way the GGD was reduced from 77.5% in the beginning of December 2015 to 76% two weeks later. And weekly reporting was abolished, for good measure.
To be continued