Hungary’s Fidesz party came to power in May 2010 after winning two-thirds of the parliamentary seats in an electoral landslide. During its 20 months in power, the ruling party has stymied economic recovery and eroded democratic checks and balances. Despite this depressing performance, Fidesz looks unlikely to relinquish control of the government anytime soon. Even with an IMF deal, political risks will remain elevated.
The government has pursued a populist and nationalist agenda with little regard for international opinion. Most recently, parliament defied the IMF and passed controversial laws that effectively undermine the central bank’s independence (see here).
Previous policy moves have included the de facto nationalisation of private pension assets, a botched mortgage relief plan, greater media restrictions, curbs on the Constitutional Court’s powers and the hollowing of the Fiscal Council, a budgetary watchdog, among others. (See my posts: Hungary and Turkey: Political Parallels, Hungary’s Debt Relief Plan: From Bad to Worse and Hungary’s Ratings Downgrade is No Surprise)
So far, this policy strategy has paid off domestically as Fidesz remains the country’s most popular political party, as shown in Figure 1.
Figure 1: Despite falling support, Fidesz still holds a wide lead over its rivals
Economy watchers remain hopeful that an IMF deal is around the corner. Erste expects an agreement to be reached in Q2. UniCredit notes Hungary’s “limited FX and HUF government deposits” and says progress needs to be made in January. However, even if Fidesz swallows its pride and signs a new IMF deal out of economic necessity, don’t expect everything to become hunky dory.
Combative Relationship with the IMF
If reached, an IMF agreement would certainly be a positive for Hungary, helping to bolster investor sentiment and avert a sovereign default, but it would not be a panacea. It’s unclear that the government would follow through and implement the tough conditions imposed by such an agreement. The government has had a turbulent, mistrustful relationship with the Fund, and this will not change overnight.
In July 2010, Hungary had a high profile falling out with the IMF due to the government’s unwillingness to reconsider its imposition of a controversial bank tax and to a lack of transparency over how fiscal targets would be achieved. (See Eastern Approaches blog post on the row.) Meanwhile, a number of Fidesz officials have made no secret of their disregard for the IMF, including Economy Minister Gyorgy Matolcsy, who said:
“We cannot attune [economic policy] to the IMF as they deeply object to all Hungarian decisions that are aimed at freeing the people from the shackles of the banks. This three-letter institution objects to every single measure we make, thus we are not attuning government policy to them, but against them.” (See Eastern Approaches: Where’s Gyorgy?)
Thousands recently took to the streets in a protest against the government. Nevertheless, the opposition in Hungary is unlikely to bring about political change. Support for Fidesz has fallen, but this disaffection has increased the ranks of undecided voters rather than bolstering rival parties, as seen in Figure 2 below. The only opposition party to see any noticeable increase in support is Jobbik, a far-right party known for its anti-Semitism. Fidesz looks reasonable by comparison.
Figure 2: Fidesz lost support in 2011, causing the ranks of undecideds to swell
*Polling was not conducted in March or August
Changing the Rules of the Game
The next parliamentary election is not due until 2014 and Fidesz has already taken steps to retain its grip on power. For example, the party has enhanced its electoral prospects through gerrymandering (the redrawing of certain districts in its favour), which can only be altered by a two-thirds majority vote in parliament. (See Politics.hu article. For more in-depth analysis, read Alan Renwick’s excellent blog post on Hungary’s New Electoral Law or the guest post Hungarian Diplomatic Protest on Paul Krugman’s blog).
In addition to redrawing districts, the Fidesz administration has changed the rules of the game in other ways. (See FT op-ed by Philip Stephens: A Hungarian coup worthy of Putin) The effects of its power grab will likely endure for many years to come even if Hungarians vote the current administration out of office.
Fidesz will remain Hungary’s dominant political party for the foreseeable future given the country’s weak opposition. Reaching a deal with the IMF will prove challenging given the government’s combative relationship with the Fund. Fidesz will likely balk at the conditions imposed. Even if a deal is reached, political risks will remain elevated as Fidesz is unlikely to fully implement IMF-imposed reforms.
- Hungary: warning lights ignored (Lex, FT, 4/1/2012)
- Hungary’s Government: The long march of Fidesz (Economist, 7/1/2012)
- IMF-deal: the stress-test of the Orban-government (Political Capital, 28/11/2011)
- Rising Political Risks in Hungary Suggest a Higher Rate Outlook (Portfolio.hu, 4/1/2012)
- Hungary’s Ratings Downgrade is No Surprise
- Hungary’s Latest Debt Relief Plan: From Bad to Worse
- Hungary’s Vicious Circle: Anemic Lending and Weak Growth
- Hungary: Finally on Investors’ Radar
- Hungary and Turkey: Political Parallels
- Fitch Raises Hungary’s Ratings Outlook: Odd Timing
- The Double Whammy: Debt and Demographics
- Is CEE Better Prepared This Time Around?