The Mad Prime Minister of Crazyland

Last month I had several conversations with some non-Hungarian speaking fund/portfolio managers dealing with this region. Practically, all of them consider us as follows (I am repeating what one of them said word for word):

“Hungary is a crazy country with a completely mad prime minister.”

After such conversation starters, you may discuss about different views, the role of the Hungarian and the foreign media, the economic principles and the turning world for hours. The long and the short of it is: foreign investors are afraid to invest in Hungary and do not understand the national measures on politics.

Nevertheless, if things are like this, there will surely not be any transactions; if there will be any yet, they will be carried out with extraordinary charges.

During the “portfolio conference”, in one of the panels it was said that insufficient and ineffective PR activities are conducted in Hungary, not enough money is spent on such activities and there are not well-planned strategies at all. All of this is true. I think, however, that a good PR strategy would not help us, either.

The fact is that we are the subjects of a macroeconomic experiment.

The experiment is dealing with the following questions: is it possible to break away from unwritten international procedures and overthrow taboos on economic policy? Are we able to go against the grain and benefit from such situation? It is the experiment that foreigners do not get the hang of. Or, if they still understand it, they do not like it – for the time being.

The experiment practically means that we can the tried and tested methods and take the “opportunity” to try rather avant-garde and aggressive ones.

Well, I think that is the right way. Or at least this start may give reasons for hope. The fact is that the two big measures (private pension funds and surtaxes) gave scope to the government for further steps. Two main aims have been reached actually without economic tightening (or rather without the tightening of export economy) with the greatest ease:

1.  Tax reduction and simplification

2.  Meeting the low budget deficit target easily

Budget reduction would be the third step. Why is it not the first one? Because budget reduction would lead to additional expenses in the short run (indemnification, costs of reorganisations, etc.) and bigger scope is needed for short-term expenses.

This is a historical moment for us, having never been experienced. I mean, with the steps having been taken so far, the government gained time and space for further measures. Furthermore, with the surplus receipts of the budget, they (i.e. the government) got the possibility of the drastic reform of bigger systems. (The beneficial result of surtaxes and the money from the private pension funds will surely not be experienced after a while. In a few years, however, a far more efficient state should operate.)

Where should reforms be started? As I have already mentioned, about HUF1,000 billion could be saved, only political intention is needed. There are very simple proposals, many a well-known economists have been repeating them like a parrot: we do not need 3,200 municipalities, so many hospitals, we should think civil support system over and streamline the big state service providers...

Just imagine – 1,000 billion!!! With so great reduction, the national budget could be positive!

Why is it important? Because we want strong economy, more workplaces, good salaries and favourable loans for the entropenours. TO GET ALL THESE, WE NEED WEAK FORINT AND LOW INTEREST RATES, BY HOOK OR BY CROOK!!!!! 

We need weak forint as we have to produce for export. We need low interest rates in order that companies may obtain cheap capital and credit. (The running amok of the last eight years was about the opposite of it: we get to this point owing to the forint having been kept artificially strong and the high interest rates – among others, we run into debts in CHF and EUR as we did not get reasonable HUF loans!!)

Weak forint with low interest rates could, however, only be sustained if Hungary does not depend on foreign financing to a large extent.

To conclude, we are subjected to a taboo-breaking and against-the-grain experiment, but I do not mind it yet. If there is political bravery to come to the forthcoming decisions, the “mad” prime minister will make history and set an example for other countries. If, however, we stop here for political reasons and do not take this historical opportunity on great reforms, the foreign investors will be right...

The “trade dodges” having been used so far do not work as there are problems not only with this country. The international financial system is out of order. As every single “patient” has different potentialities (think of the USA or Germany) and seeks for its own recovery, I do not mind if we are trying to work out new remedy.