Hungary Investment Plunge Damps Orban Optimism on Economy

Hungarian investment dropped the most in more than three years, damping Prime Minister Viktor Orban’s optimism that his economic policies will lead to sustained growth.

Investment plunged 8.7 percent in the first quarter from the same period last year, the biggest drop since the fourth quarter of 2009, the statistics office said today.

The European Union this week recommended allowing Hungary out of its budget monitoring for fiscal offenders for the first time since the country joined the bloc in 2004. Orban said yesterday this was a validation of his economic policies, including Europe’s highest bank tax and extraordinary corporate levies such as on the energy industry to narrow the budget deficit. The steps have damaged lending and investments.

“The investment figures don’t reflect much confidence in the economy,” David Nemeth, chief economist at KBC Groep NV (KBC)’s K&H unit in Budapest, said by phone. “Relying on extraordinary taxes is a dangerous game and this is the whiplash.”

The forint dropped 0.6 percent to 296.11 per euro at 2:10 p.m. in Budapest, taking its three-day loss to 3.3 percent, the worst since November 2011. That pared the forint’s gain to 1 percent in the past month, still the best performance among 10 emerging-market currencies in Europe, Middle East and Africa tracked by Bloomberg.

The forint weakened against the euro this week along with 23 out of 24 emerging-market currencies tracked by Bloomberg as investors speculated that the U.S. Federal Reserve may reduce its stimulus measures.

Pension Nationalization

Orban, who turned 50 today, leads in all polls ahead of elections next year, four years after winning an unprecedented two-thirds legislative majority. He nationalized private pension funds and levied extraordinary taxes on banking, energy, retail and telecommunication companies to reduce the budget gap below the EU limit of 3 percent of economic output. He curtailed the top court’s powers to rule on economic issues to remove legal oversight over the measures.

Investment in the energy industry, hit by the government’s reduction in household utility prices this year, plummeted 31 percent in Hungary in the first three months of the year while manufacturing investments fell 13 percent, the statistics office said.

Shifting Regulations

The business environment in Hungary has “constantly deteriorated in the last three years due to a series of measures including restrictions on investors and an unstable regulatory framework,” the European Commission said on May 29. At the same time, the EU executive acknowledged that the government has done enough to keep the budget deficit below 3 percent in 2013 and 2014 and recommended Hungary’s exit from the excessive budget deficit procedure and removal of the threat of cuts in the nation’s EU funding.

The outlook for the Hungarian economy is “one of the most promising in Europe,” Orban said yesterday at a conference in Budapest on the “Hungarian model.” The economy is on the verge of an “economic growth turnaround” and the time has come for companies to take out loans to finance investments, central bank president Gyorgy Matolcsy said today, according to state-run MTI news service.

Economic growth may accelerate in the rest of the year, Orban said in an Inforadio interview yesterday, allowing the government to cut household gas and electricity prices further in the fall despite protests from energy companies.

The “primary reason” for Hungary’s economic predicament is the “lack of an environment that ensures the security and profitability of investments and leads to a sustainable growth path,” the Joint Venture Association, a lobby group for investors in Hungary, said in a Dec. 11 statement.

The economy grew 0.7 percent from the previous three months in the first quarter, expanding for the first time since 2011. The Cabinet forecasts 0.7 percent growth this year, with Orban predicting an expansion of as much as 1 percent. The government reduced household energy prices by 10 percent on Jan. 1.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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