FACTBOX-Key political risks to watch in Hungary post-elections

By Krisztina Than

BUDAPEST, May 4 (BestGrowthStock) – The centre-right Fidesz party
will form Hungary’s new government this month after it won a
two-thirds parliamentary majority in April elections, ousting
the Socialists after eight years.

Fidesz will have to kickstart the economy after a deep
recession last year, while also keeping the budget deficit on a
sustainable path at a time when Hungary is still under the
scrutiny of the International Monetary Fund (IMF) and the EU.

The country, which narrowly escaped financial collapse in
2008 with a rescue package from the IMF and the European Union,
has regained investors’ trust over the past year with deep
budget cuts but its high public debt keeps it vulnerable.

Followings are key risks to watch in coming months.

DEFICIT/IMF

Fidesz has said the 2010 deficit could come in well above
the outgoing government’s target of 3.8 percent of gross
domestic product due to a lag in revenues and one-off items not
included in the present budget, such as the consolidation of
debts of state-owned firms.

While both lenders and the central bank have warned about
risks to this year’s deficit target, a big overshoot could upset
markets. Fidesz has said it wanted to negotiate a new agreement
with lenders — as the current financing deal expires by October
— but prime minister elect Viktor Orban said Hungary was not
“subordinate” to the IMF or EU, and the new government would
seek a “partnership” and backing for its tax cuts and a
multi-year plan to reduce debt.

Fidesz’s economy minister designate Gyorgy Matolcsy said
that a deficit between 4.5 and 6.5 percent this year could still
be acceptable but also said the new government would gradually
reduce the deficit in coming years as Hungary is still
vulnerable due to its high debt. [ID:nLDE6420XT]

Matolcsy told Reuters before the elections that Fidesz would
propose a new precautionary deal to lenders which could serve as
a safety buffer. [ID:nLDE62I192] Hungary has not drawn upon any
fresh funds from the existing IMF package so far this year as it
can finance itself from markets again.

What to watch:

— Comments from the IMF/EU on relaxation of the deficit
target for this year and to what extent that would be acceptable
to lenders.

— Fidesz’ 2011 budget plans

— Plans on planned tax cuts, their size and when they would
come, in 2010 or 2011, or later; how they would be offset on the
spending side and whether there will be a spending side
overhaul.

— Talks with IMF and EU planned for June.

RESTARTING THE ECONOMY/REFORMS

Fidesz has promised to create jobs, cut taxes and help
domestic businesses, but in fact its fiscal room for manoeuvre
could be limited. The strong mandate it won in elections from
voters empowers Fidesz to push through key reforms in the local
government sector, health care and education, but there is a
risk the new government could fail to carry out deep changes for
fear of losing public support.

What to watch:

— Whether beyond symbolic measures (such as reduction of
size of parliament or municipal councils) Fidesz has plans for
deep structural reforms — in healthcare, education, local
governments — that would help long term fiscal sustainability.

If Fidesz carries out much-needed reforms which help keep
the budget in check, that would boost market sentiment. However,
if it fails to do so and tries to muddle through with a higher
deficit trajectory, that could disappoint markets and investors.

CENTRAL BANK AND MARKET REGULATOR

Prime Minister elect Viktor Orban has pledged to “renew” the
central bank and financial regulator PSZAF but has not outlined
what this overhaul would mean. Right after the elections on
April 26 he lashed out against the central bank saying the bank
was no place for “offshore knights” — referring to Governor
Andras Simor’s former investments in Cyprus. A day later a top
Fidesz politician called on Simor to resign. Simor said he would
fill his mandate which expires in 2013. Fidesz will put pressure
on Simor to resign, or could try to effectively remove Simor.

What to watch:

— Any proposals from the new government to modify the
central bank law or the structure of financial supervision.

— Signs of increasing pressure on central bank monetary
policy for lower interest rates or weaker currency.

For an analysis on this pls. click on [ID:nLDE63S24A]

INCREASED STATE INTERVENTION

Fidesz has said it would review transactions such as the
renationalisation of airline Malev or deals which it says were
against taxpayers’ interest and also said it wanted to review
contracts with public utility services firms. While Fidesz is
regarded pro-business and backs foreign investment, it may
attempt to interfere with some private sector contracts.

DUAL CITIZENSHIP

Fidesz said it would ease access to dual citizenship for
ethnic Hungarians living in neighbouring states which could lead
to tensions with Slovakia and possibly some other neighbours.

What to watch:

— The government’s proposal to modify the law on
citizenship. This is set to be among the first legislative
proposals.

— Whether citizenship would also include voting rights

FAR RIGHT JOBBIK PARTY

The far-right Jobbik party performed strongly in elections,
winning 47 seats in the next parliament. Jobbik, which has
capitalised on public discontent over the economic crisis and
resentment against the Roma minority, is expected to be very
vocal in parliament and will put pressure on Fidesz — also
possibly with rallies — if it believes the new government’s
policies do not meet voters’ expectations.

What to watch:

— With Fidesz having a two-thirds majority in parliament,
Jobbik cannot block reforms. But radicals could see increased
legitimacy as the leader of Jobbik can speak in parliament every
week. Jobbik can also stage demonstrations to protest government
policies.

For political risks to watch in other countries, please
click on [ID:nLDE6430Y1]
Investing Analysis

(Reporting by Krisztina Than; Editing by Sonya Hepinstall)

FACTBOX-Key political risks to watch in Hungary post-elections