Foreign investors and businesses will remain under pressure for another four years as Hungary’s right-wing party, Fidesz, secures a legislative supermajority for a second-term.
In the past term (2010-2014), Hungarian Prime Minister Viktor Orban, along with his right-wing party, Fidesz, has embarked on his policy agenda of market centralisation, economic statistism, and nationalism.
Orban has enacted a number of Brussels-unfriendly economic policies, such as a 16% flat income tax and crisis taxes on big companies, forced reductions in utilities prices, nationalisation of pension funds, and relief schemes for foreign currency mortgages. The policies have bashed foreign-owned businesses, scared foreign investors, and clashed, on many occasions, with the European Union.
With its landslide re-election on 7 April 2014, Orban’s party again secured a two-thirds legislative supermajority in the parliament. The overwhelming mandate given to Fidesz may be a sign for foreign businesses to prepare for another ‘cold winter’ of Orbanomics – an odd mixture of Orban’s unpredictable free market, populist, nationalist, and, sometimes, borderline Chavista, policies.
With the upcoming four years of the second Fidesz term under the leadership of Viktor Orban, foreign businesses, in particular, are likely to face a number of key risks and uncertainties:
First, financial markets will remain particularly concerned about the Fidesz supermajority in the legislative and the policy unpredictability. Viktor Orban and his party had already entered their previous term in 2010 with a 68% majority and used it to change constitutional laws and pass unpredictable policy changes, such as Hungary’s media law.
He was also criticised in January by the European Parliament for using his legislative majority to circumvent or eliminate democratic checks and balances, curb judicial authority and write laws into constitution. The same supermajority also facilitated four constitutional amendments.
At the same time, the current election has shown that Fidesz retains its power to make fast and sudden decisions with policy unpredictability. Its legislative power will remain a significant concern for businesses and investors.
Second, recent electoral successes of Jobbik, a far-right party, will also influence legislative development toward more uncertainty and harsh measures for foreign investors.
Electoral results revealed that one in every five voters backed a far-right opposition party, Jobbik, which came out of the election as the second largest single party in the legislative. More importantly, Jobbik did particularly well in poor regions, where itscored better than the united coalition of the ‘left’ parties.
A strong support for the far right and a weak ‘left’ opposition is likely to put pressure on Orban and Fidesz to continue focusing on issues important to radical-nationalist voters, such as anti-foreign capital, statist, anti-bank measures, as well as rhetoric and governing style designed to collide with the international community and the EU. Any shift toward more growth-friendly policies could take time to materialise. Policies of the previous term are more likely to continue to weigh on Hungary’s growth prospects.
Third, Victor Orban’s domestic policy is outdated and will continue to keep pressure on foreign companies, most notably in the energy and banking sectors. In line with Orban’s plans to re-centralise key economic sectors, energy companies have already faced additional price cuts to pressure them out of the market.
As of April 1, Hungary’s Parliament approved an additional 6.5% reduction in household natural gas prices, forcing energy companies to comply. Planned cuts of 5.7% in electricity prices in September and 3.3% cuts in heating prices in October will put further pressure on energy companies in the country, deteriorating their profitability.
In addition, with the government’s goal to increase participation of local businessmen in the banking sector, the pressures on foreign banks will continue to build, especially with a scheme to swap FX loans into HUF still remaining among the government’s priorities.
While domestic policy will likely remain as unstable and unfavourable towards foreign companies as in the last term, Hungary’s international policy will be defined by a complex balancing act between the European Union and the increasing relationship with Russia.
Orban is likely to continue a strategy of selective confrontation with the EU, focusing on questioning Brussels’ authority as it is expected to give additional support from the far-right voters. This trend is particularly worrying for potential investors in the country and could be seen as Hungary distancing itself from European markets.
At the same time, Hungary remains the biggest user of Russian energy in Europe. With the recent 14 billion Euro expansion of the Paks nuclear power plant from Russia, Hungary’s new deal is likely to put additional strain on foreign-owned energy companies and increase Hungary’s reliance on Russia.
While the recent election signifies the potential continuation of ‘Orbanomics’, foreign companies and investors will likely face ‘more of the same’, unpredictable policymaking, tax burdens, and pressures within key economic sectors in the upcoming year.
