“Observer”: The Hungarian Economy: How much smoke and mirrors? Part I

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.”

♦ ♦ ♦

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.

teljesitmenyDisputed 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 [2015] 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:

bruttoI 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

March 22, 2016
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Istvan
Guest
Apparently Eva you and George Pataki must be looking at different nations called Hungary. I suspect your perspective on the economic situation is closer to reality. George Pataki, the Hungarian-American former governor of the state of New York, said in an interview with the Hungarian weekly Figyelő which was discussed in hungarytoday.hu last week that Hungary has the possibility to become one of the most competitive countries of the world and he urged Hungarians to adopt a more optimistic attitude. He also praised the country for its “fantastic” ability to attract foreign capital thanks, among others, to its business-friendly tax system. In the interview he also blasted the Obama administrations “hypocritical, almost hysteric” political correctness for adopting the critical positions of the leading bodies of the European Union, such as allegations on corruption and an over-centralized political system. Pataki has associated himself over the years with extreme anti-communist elements in the American Hungarian Community and has spoken before at meetings of the World Federation of Hungarian Veterans. The Federation was founded by Brigadier-General András Zako who formed a battalion of former military, police and gendarmes in hopes of launching an attack to over throw Hungary’s communist government in the late… Read more »
webber
Guest

“the possibility to become one of the most competitive countries of the world..”
Pataki wasn’t exactly lying, it’s just that that’s an empty phrase. North Korea also has this possibility. Every country does.

Observer
Guest

OT a bit but interesting subject for a future post.

George Pataki has made a fool of himself, judging from the excerpts, couldn’t find the original interview. Obviously he was given the Orban propaganda script, since he spoke exactly on the same current issues, in exactly the same way (like the trolls here) i.e. exactly the opposite of the truth.
Although Pataki has been involved with Tamás Fellegi*, I dont want to believe Pataki has been bought. My tip is that he was duped by well dressed and smooth Fellegi and co. People with no knowledge of politics Hungary think spins, half-truths and embellishment and later can’t fully believe the brazen lies-in-their-faces. I have seen it all too often.
* FYI Fellegi is the Orban commissar for overseas propaganda, who set up the Hungary Initiatives Foundation (in place of still born Friends of H). HIF was financed by the Orban regime to the tune of $ 15-20 million. Pataki was a trustee of HIF.
http://www.politics.hu/20131108/exclusive-former-hungarian-minister-becomes-head-govt-lobbyist-in-washington-despite-position-at-independent-us-non-profit/

webber
Guest

Pataki has been bought.
His political career is effectively over, he doesn’t care what American voters think any more. He’s earning money now in his retirement.

e-1848
Guest

Pataki is completely incompetent in his praise of the current Hungarian regime.

Istvan of Chicago is a valuable asset to this blog. We need such people, who could cut the umbilical cord to our lying past. Let us be honest Americans and honest Hungarians at the same time.

Once, we can be liberated from our own disinformation mess, we will be again a dignified nation, the proud sons of Ferenc Deak.

Guest

Pataki…really just because he was ‘guvnor’ doesn’t mean he speaks ‘ex cathedra’ on Magyar life! Like some politicians we know they have a hard time when it comes to separate the wheat from the chaff. On the regime well he’s as dumb as a box of rocks.

Guest

So even without having read the second part of this article by “Observer”, it is clear that nothing, absolutely nothing which Orbán says should be believed.

What a sorry state for Hungary.

bimbi
Guest

When Orban/Fidesz/KDNP came to power in 2010, along with all the anti-Gyurcsany/Bajnai propaganda, their ONLY task as a government was to restore the Hungarian economy to growth. In this the government has been an abject FAILURE. In place of a coherent and all-embracing economic policy we have been offered blind centralized control, selfish partisanship, widespread and massive theft (pensions, EU funds…) and a massive campaign of lies (Magyarorszag jobban teljesit).

To stop the criminality the government has to go.

Member

A nice little illustration of how bluntly the Orbán government can lie.
As recently reported by 444.hu (http://444.hu/2016/03/22/a-magyar-idok-es-a-szazadveg-bemutatja-a-tokeletes-grafikon), the Századvég institute just found out that “only” 21% of the Hungarians support the continuing public protests of the teachers against the disastrously incompetent way the education system is being managed, while 78% think that instead of demonstrations, the conflict should be solved by the way of negotiations (the notorious “round table”, that is?).
Now irrespective of how credible these figures are (knowing the loyalty of Századvég to the government), “Magyar Idők” (the loyal organ of the government) illustrated them with “The Perfect Graphic”:comment image . That’s the narrowest one-fifth I have ever seen. (Add a random joke about the efficiency of maths classes in Hungarian schools…)

Observer
Guest

OMG

Please help me file for a Guinness Book record and for a Hungarikum entry.

From cretins to cretins (or believers).

Guest

From what I’ve seen I always suspected that the economy wasn’t really performing by itself.

All those lovely billboards saying: This (enter any project name here) was financed by the EU with 123 456 798 HUF (yes, they always give an “exact” number, not rounded to a million or at least a thousand …) give the impression that only as much is spent on projects in the cities and villages as can be taken from the EU.

Every Hungarian company that I know (whether small or large) is fighting to survive …
And my family and neighbours are telling me the same!

spectator
Guest

Every Hungarian company that I know (whether small or large) is fighting to survive …
And my family and neighbours are telling me the same!

And in the end of the day they’ll go and vote for Fidesz.
“Still better than that leftliberalbolshevikkommunistkapitalist crowd as it was before…!”

See?

Look up and read the “Barabbas” by Frigyes Karinthy — sorry, I don’t have the link right now — and figure out the reason. Or the lack of it, thereof.

bimbi
Guest

@wolfi7777
I must give a correction here. Exactly in Hungary you NEVER see:

This (enter any project name here) was financed by the EU with 123 456 798 HUF

What you DO see is that the project is financed by the Hungarian government (Szechenyi terv) and the EU. However, the figures that would show the relative contributions are NEVER given. Why should they be when the government contributes 1% and the EU 99%? This allows Orban his freedom to rant and rave against the EU without having to acknowledge his deep indebtedness to the organization. Not lies, just half-lies.

petofi
Guest

So let’s see ourselves clear here: the exact sum is what the EU has given for the project–it’s too easy to check that so they can’t lie there–but the sum is not what is being spent on the project (unless we had in what is stolen off the top, which I figure to be 40%, atleast.)

webber
Guest

I think it’s not so easy as that – the projects are overpriced by x% (say 40%), so there’s no telling what was not actually spent on the project because 100% of funds, on paper, were used for the project (ah, the utility of the ÁFÁs számla! A receipt that exists nowhere else in Europe. Make one for as much as you like, boys…)

Observer
Guest

Yes, overpricing is the most effective tool. Recently Transparency Inl stated that 90% of EU financed project are 25% overpriced. I find this conservative, but use this on EUR 15 billion cohesion grants to find how much is stolen this way. Corruption cases can sustain another daily blog.

Observer
Guest

An extreme example is thw http://www.nak.hu website – someone was paid 530 million Ft for development. Have a look, I was told such mundane page is 1.5 million tops, if so 99% was stolen by n0000000% overpricing. Call the Guinness again.

webber
Guest

Thanks for that – and for the article! I enjoyed it.

Istvan
Guest

As is obvious today is March 23rd the day demonstrators on March 15 for education reform would be the end date for the government to agree with the 12 points and apologize for its six years of terrorizing and humiliating the Hungarian people or a one hour national action would be called for March 30. Yesterday this press release was issued http://www.tanitanek.com/Info/CaseItems?rowKey=e85dda08-bdc9-4ba1-8fa7-4cf7a8a94d87&partitionKey=Summary

Guest

Thank you Observer for your analysis. In a modern way, nothing like getting an example of ‘economics’ being called the ‘dismal’ science.

Dismal where its lever pullers lie and cheat with statistics and on the other end where Magyar householders trying to make a decent living appear as gerbils on speeding treadmills just trying to get by.

Your numbers probably hide all the deep economic angst underlying the bald stats. Next up perhaps in the cities and falus?…..’Barataim, can you spare a forint? And then the expected refrain: ‘Nincs, nincs, sajnos nincs’.

Member

Is it not ironic (yet instructive) that the main beneficiaries of the Brussels tragedy will be Viktor Orban, Donald Trump and their likes? Not just Schadenfreude but Schadendusel…
comment image

Guest

Is it possible that the above are familiar with the theme that follows?

Comments of Hermann Goering, interviewed by Gustave Gilbert during the Easter recess of the Nuremberg trials, 1946 April 18, quoted in Gilbert’s book ‘Nuremberg Diary.’…

“Naturally, the common people don’t want war; neither in Russia, nor in England, nor in America, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship.

Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country.”

petofi
Guest

The nature of a long-standing criminal enterprise

Hungary has been run as a criminal enterprise for at least 6 years. After such a length of time, the ‘ties that bind’ are firmly held. The enterprise develops a certain ‘specific gravity’ that is hard to escape from. Thus, if the head/leader is removed that doesn’t mean that the criminal enterprise has been defeated. The remains will pull together; become even closer and tighter in maintaining its turf. The leader will be replaced.

Hungaricum.

Hajra Magyarok.

petofi
Guest

We have a classic example at hand: UEFA has decapitated the head. Yet, the replacement is a young fellow from a town no more than 20 km. from where Blatter lives. Any chance that Blatter has mentored the fella? I think not.

So what you have, is the ‘center’ (Blatter and his associates) demonstrating their strength within the organization by getting their
‘doppelganger’ (thanks, Henry) elected.

Member

Observer – Nice report and I look forward to seeing the next installment.

If I may offer a slight correction — the 2007 GGD was 65.6 percent, not 56.6 percent.

Observer
Guest

Sorry, embarassing typo.

Observer
Guest

And another EMBARRASSING one.

tappanch
Guest

The discontinuation of the weekly Treasury numbers makes it much more difficult to catch the manipulation in the statistics.

The National Bank (MNB) still publishes quarterly gross and NET debt figures.

The gross debt of the CENTRAL government was at
24.7 trillion (as reported by Treasury) or
33.0 trillion (as reported by MNB)

The MNB numbers include the spent retirement funds (2.8447 trillion as of 12-31-2015)

The gross “consolidated” debt of the full government has increased by 3.58% y/y (Dec 31) according to these statistics.

Let us also remember that the European Union generously provided 9.1 trillion to Hungary through Dec 21, 2015.

http://www.portfolio.hu/unios_forrasok/gazdasagfejlesztes/ujabb_elkepeszto_hatart_lepett_at_az_eu-s_penzek_kifizetese.224451.html

Observer
Guest

Tnx for your always good stats.

This is the problem of many diverse definitions and figures.
However, my firm impression is of growing GGD, otherwise why obscure, why resort to shallow tricks like zeroing the government’s liquidity/ operational cash for a day or buying back and forth gov. financial instruments with the HNBank at the end of December.
Another set of ludicrous tricks believed to be great by the half baked.

Tyrker
Guest

“the GGD in the last pre-crisis year 2007 was 56.6% GDP”

No – according to the linked chart, it was 65.6%, with the numbers showing a steady increase during the pre-crisis years (2003-2007) from the 2003 figure of 57.6%.

Guest

Wow!
Tyrker, are you being paid to analyse everything on HS?
Then you should also read the comments – because the error has already been noticed two days ago by Pibroch …

Tyrker
Guest

No, I’m actually not even a frequent visitor. I do read the posts when I have the time, but I won’t read every comment. However, the editor ought to read them and act upon them when necessary – in this case, this would entail correcting the mistake in question, which (still) hasn’t happened.

Guest

“Editor”?
You really are crazy – or just a paid troll?
This site is a private thing by Prof Balogh and her guests – no one gets paid to write or edit here …
So of course mistakes can happen and this has been corrected.