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Budapest's Hairpin Turn (Int'l Edition)

International -- European Business: HUNGARY


The global crisis forces a quick swing back to austerity

When Hungarian Prime Minister Viktor Orban ousted the reformed communists in May's elections, investors got a severe case of the jitters. Orban, leader of the center-right Hungarian Civic Party, promised higher pensions. Then he formed a coalition with the populist Independent Smallholders' Party, which wanted to slash taxes. Once in office, the Premier reversed some earlier austerity measures, spending more on crowd pleasers such as child benefits.

But now it's course-correction time. Orban, 35, plans to slash spending in his first budget, due by early November. He may limit wage and pension hikes to inflation plus 3%, instead of the 5% jump that labor unions want. And unless deadbeat companies can reinvent themselves, he plans to cut off state cash. One target: busmaker Ikarus, which has been sideswiped by the Russian crisis. "Taxpayers' money is not for bailing out companies that are hopeless," Orban told BUSINESS WEEK.

The former anticommunist agitator doesn't have much choice. Hungary has been whiplashed by the emerging-market meltdown, with the BUX share index plunging 48% from its July peak. Growth is slowing, too. The government now expects 1999 growth of 5%--down from an earlier forecast of 5.5% to 6%, but still rosy compared with the 4% private economists expect. Even that depends on Western Europe--which buys 63% of Hungarian exports--staying buoyant. "The Russian crisis has driven home the point that doing the wrong thing could lead to disaster," says London-based Deutsche Bank economist Bart Turtelboom.HEAVYWEIGHT HELP. Doing the right thing will be tough. To placate his coalition partners, for example, Orban is pledging a $46 million handout to farmers hit by low grain prices. And a promise to hike the wages of Interior Ministry employees by a real 7% is angering other workers. So Orban still may have to do some hard selling if he hopes to cut the budget deficit to 4% of gross domestic product next year, from this year's targeted 4.9%. "He has both the political will and ability," says Istvan Racz, a Credit Suisse First Boston economist in Budapest.

Even if Orban falters, investors and corporate managers are counting on Budapest's financial heavyweights to push him back on track. Gyorgy Suranyi, the no-nonsense central banker, for instance, has kept a tight rein on the money supply since battling twin budget and trade deficits of more than 8% in 1994. Before becoming Finance Minister, Zsigmond Jarai turned around Hungarian Credit Bank Ltd., which had been bought by the Netherlands' ABN Amro. "They are seasoned businesspeople with reputations for keeping their word," says Janos Csak, chief financial officer at Matav, a telecom company.

Not surprisingly, Orban is putting an optimistic spin on Hungary's prospects. "More investors will come back than those who left," he says. Perhaps. But first, he has to do his part.By Karen Lowry Miller in Frankfurt and Christopher Condon in Budapest

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