Hungary needs a stronger forint because the current rate endangers foreign-currency borrowers, said Attila Mesterhazy, the leader of the opposition alliance preparing for the country’s April 6 general election.
Hungary will phase out most industry taxes to encourage investment and boost economic growth if the opposition upsets Prime Minister Viktor Orban’s poll-leading Fidesz party, Mesterhazy said in an interview in Budapest yesterday. The alliance’s candidate for prime minister also urged the central bank to halt monetary easing.
The forint has weakened 14 percent against the euro in the past four years as the central bank cut its benchmark interest rate to a record-low 2.6 percent to help the recovery from a 2012 recession. The fate of foreign-currency borrowers struggling to keep up with repayments is a key campaign theme, along with a debate over ways to spur economic growth.
“An exchange rate weaker than 300 per euro isn’t good for the economy,” said Mesterhazy, 40. “A rate stronger than 300 is the equilibrium that serves exporters and helps competitiveness.” The weaker forint increased the burden on borrowers with foreign-currency mortgages, creating a social problem that threatens to “spin out of control unless the government tackles it,” he said.
The forint has lost 3.5 percent against the euro this year, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg. It weakened 0.2 percent to 307.61 per euro by 4:20 p.m. in Budapest.
Mesterhazy’s bloc, which includes the Socialist Party that governed between 2002 and 2010 as well as the formations behind former Prime Ministers Ferenc Gyurcsany and Gordon Bajnai, trails Orban’s Fidesz in all polls.
The latest survey, published March 31 by the polling company Szazadveg, put Fidesz’s backing at 33 percent among eligible voters to 19 percent for the opposition alliance, 14 percent for the Jobbik party, which describes itself as “national radical,” 5 percent for the green group LMP and 27 percent undecided. The March 27-30 poll of 1,000 people had a margin of error of 3.2 percentage points.
Mesterhazy said surveys are misleading because people are “scared to voice their opinions” under Orban, who’s amassed more power than any of his predecessors since the fall of the Iron Curtain.
The government introduced Europe’s highest bank levy and a transaction tax on commercial lenders as well as special taxes on telecommunications and energy companies. Mesterhazy said he would lower the bank tax and phase out the rest of the measures within four years if economic growth allows.
“Economic policy is unpredictable, and because of that confidence is at an all-time low,” Mesterhazy said. “We need to create growth and jobs.”
Investment fell 5.2 percent in 2012, the fourth consecutive year of contraction, according to the Budapest-based statistics office. It has trailed eastern EU peers every quarter for the past four years, according to Eurostat data. Investment climbed in 2013, helped by a 34 percent increase in government spending, including on public works programs that boosted headline employment data.
A Fidesz victory would mean more “unorthodox” economic policy and a worsening business environment, Eurasia Group analysts Mujtaba Rahman and Charles Lichfield said in research note today. “Uncertainty will remain over a large number of possible government measures, with state intervention a likely option in many areas.”
Gross domestic product rose 2.7 percent in the fourth quarter from a year earlier, the biggest increase in seven years. The budget deficit was 2.2 percent of GDP last year, which means the country is poised to avoid returning to European Union monitoring for fiscal offenders, Finance Minister Mihaly Varga said March 31. Hungary exited the excessive-deficit procedure last year for the first time since it joined the bloc in 2004.
Even so, economic growth, at 2.2 percent this year, will probably lag behind the Czech Republic, Poland and Slovakia, Goldman Sachs Inc. forecast March 31.
Hungarians held $11 billion in foreign-currency mortgages and home-equity loans at the end of January, according to central bank data.
Orban has said he wants to phase out household foreign-currency mortgages after allowing the early repayment of some of those loans at below-market exchange rates in 2011 and offering a temporary period of fixed exchange-rates for repayments.
A new Fidesz government would eliminate foreign-currency borrowers’ currency risk by 2015 with an aid program based on the current exchange-rate cap offer and the conversion of these loans to forint, Antal Rogan, Fidesz’s parliamentary group leader, told news website hvg.hu.
Banks would be open to a negotiated solution in which the government and lenders would assume the bulk of costs to ease the burden of borrowers, according to Mesterhazy.
A flat 16 percent personal-income tax system should be replaced by a higher rate of as much as 30 percent for those earning more than 500,000 forint ($2,248) a month and a lower rate for those earning less to make the tax code fairer, Mesterhazy said. The minimum wage should be increased by about 50 percent to 100,000 forint after taxes, he said.
“The opposition seems to have realized that an expansionary monetary policy and a weak domestic currency are the wrong approach for Hungary,” especially in light of the foreign-currency denominated debt burden, Ulrich Leuchtmann, the Frankfurt-based head of currency strategy at Commerzbank AG, said in an e-mailed note today.