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Hungary special report 2015: Against the grain

Hungary may have steered an unorthodox economic policy course but it seems to have worked, pulling the country out of recession and putting it back on a growth path.

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Hungary was in a dark place after the financial crisis. A decade of uncontrolled borrowing had left the central European nation deep in debt. Social and political instability was high; employers were shedding jobs; non-performing loans were rising within the troubled financial services sector.

Scroll forward a few years, and the outlook is considerably brighter. Hungary still faces challenges, not least the issue of what to do about the eurozone, its still-deeply depressed primary trading partner. But growth is back, with gross domestic product set to have expanded by around 3% in 2014. A once out-of-control fiscal deficit has been trimmed to less than 3%, while inflation, thanks in large part to lower oil prices (which also benefit the resource-scarce economy) is practically non-existent.

Unorthodox but durable

In its latest quarterly economic outlook, published in December 2014, Barclays pointed to the economy’s sound fundamentals. The government under prime minister Viktor Orban may have pursued unorthodox and unconventional policies to extricate Hungary from recession (but then, so have the central banks of the US, UK and Japan), but, noted Barclays approvingly, these have so far proved to be remarkably durable.

More good news came as the new year ticked in. Fresh jobs data released in the first week of January by the Hungarian National Bank (MNB) showed that just shy of 200,000 jobs were created in the previous 12 months. Leading individuals in the Orban administration, not least MNB governor György Matolcsy, are clamouring for an upgrade of the country’s sovereign credit rating.

Matolcsy is one of the key individuals behind the country’s remarkable turnaround. In an exclusive interview with Euromoney in December, the central bank chief pointed to the importance of reforms launched in the months following the general elections of 2010. New taxes were levied on some industries while other taxes, including those on corporates and income, were trimmed or slashed, helping boost job creation and retail spending. “Without [those reforms], we couldn’t have turned the economy around, returned to growth and, crucially, cut the deficit,” Matolcsy said.

Another clue to the revival of this small, open and business-friendly economy lies in its rejection of the EU’s official economic policy mix. That perhaps helps to explain Brussels’ antipathy toward Hungary’s economic revival – and its flat-out surprise to see Budapest not just return to growth but to thrive within its new skin.

Growth, not austerity

Matolcsy points to the importance of pursuing a growth-oriented strategy and rejecting the strictures of austerity. Budapest has blazed its own trail, slashing government expenditure, trimming the social safety net, and making it easier for companies to put people to work. Foreign direct investment has soared as a result, with the country sucking in capital from across the world, notably across fast-growing sectors such as auto and auto-part production.

The future augurs well. Growth is likely to come in at 2.8% in both 2015 and 2016, according to economic consultancy Századvég Economic Research Institute. Economy minister Mihaly Varga tips the budget deficit to be a shade over 2.6% this year. Heinrich Pecina, a senior partner at Vienna Capital Partners, an Austrian private equity group and perennial investor in the country, sees Hungary remaining one of the best-performing economies in Europe. “You just need to look around Budapest to see a city buzzing with business activity,” he says. “It’s a small country but it has great potential – great human resources, very open and with bags of potential.”

Profound change

In short, it’s remarkable how far Hungary has come, so quickly. Before 2010 and the arrival of Viktor Orban for his second stint as premier, the country was teetering on the edge of a technical bankruptcy, seemingly destined to cave in to repeated International Monetary Fund requests to accept bailout assistance. Its economy is now all but unrecognizable from those dark days, with growth back, job figures improving every month, inward foreign direct investment up sharply, and annualized retail spending rising for the first time in nearly a decade.

And while there were doubts in some circles about whether the country’s unique growth and reform model would work, no one within the Orban administration is surprised at the remarkable economic turnaround. The trick now will be to keep the recovery on track and to avoid loss of momentum. “If you look at economic fundamentals, I don’t know if they have ever looked as good as they do today,” says László Bencsik, chief financial and strategic officer at OTP Bank, the country’s largest commercial lender.” With the country’s dark days now receding, it’s hard to find anyone that disagrees with that notion.

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