Hungary Votes, but What of the Economy?
An outgoing Prime Minister called Gordon. Bitter political rows over the true size of the budget deficit and an election battle which has left the incumbent government struggling to convince voters it should be given another term.
No, I'm not making an early call on the UK General Election set for 6th May but taking a look at the Hungarian elections, which kicked off Sunday.
The opposition Fidesz party appears to be in a commanding position but should it succeed in ousting the Socialists and forming a Government after the second round of voting on 25th April, what will this mean for the Hungarian economy?
To recap, Hungary became the first EU country to seek an IMF bailout back in 2008 when its finances were teetering on the brink.
The government under Gordon Bajnai has made a strong effort to rebalance the economy within the IMF/EU program but this austerity has come at a political cost for the Socialists and it appears Fidesz looks set to win a big majority.
Fidesz's leader Viktor Orban has been highly critical of the constraints on the economy that the IMF $27 billion loan has created, and would likely seek a renegotiation of the conditions. But will this create a new danger for the country?
"Any market volatility is more likely to come after the second round of elections, as the new government gets its hands on the levers of power," writes Nomura's Peter Attard Montalto, adding: "This will be a key test of how much populist (market-scaring) election rhetoric becomes actual policy."
EU, IMF Constraints
Nomura believes Orban's party is set to win a strong majority but will still be heavily constrained by the EU, IMF and the financial markets and so there will only be a slight widening of the budget deficit.
In addition, the importance of keeping stability and the confidence of the markets probably means central bank Governor Andras Simor will be kept in place.
Economists over at RBC Capital Markets also see a Fidesz victory and believe this predictability has meant there has been little spill over into the financial markets.
"Despite its assumed status as a risk proxy for the region the HUF (Hungarian Forint) has remained remarkably stable. The EUR/HUF has traded in a 260-280 range since mid-2009," they wrote.
RBC notes that the Hungarian central bank has cut rates in each of its last nine meetings and is expected to do so again at its 26th April meeting. Despite this monetary cohesion, RBC says that Orban's economic manifesto has been decidedly 'sketchy' in its detail:
"Fidesz has said it aims to create a million jobs over the next 10 years, a fairly meaningless promise given that the time frame spans two-and-a-half election cycles."
The country's fiscal problems and reversing the build-up of public debt, now standing at 80 percent of GDP, are the most pressing problems for whichever party wins, according to RBC.
In fact, consolidating off budget items into the headline budget deficit will cause the shortfall in GDP to jump from just under 4 percent, agreed with the IMF, to a figure closer to 7 percent.
In terms of the stock market reaction though, little movement is expected given the high expectation of a Fidesz victory.
RBC notes the Budapest Stock Exchange is up in the region of 18 percent this year and that the bond market has also outperformed, with 10-year yields down over 100 basis points since the start of the year (to 6.75 percent), now significantly lower than that demanded by investors in Greek debt.