Orban Faces Budget Showdown After Hungary’s Local Elections

Hungarian Prime Minister Viktor Orban is set to win local elections Oct. 3, securing his unprecedented grip on power and freeing him of electoral pressures until 2014.

Investors are betting that will give Orban the freedom to spell out the concrete economic policies and budget cuts they’ve waited for during four months of battles with the European Union and International Monetary Fund that roiled financial markets.

The forint has gained 4.3 percent against the euro, the best performance among 31 major currencies tracked by Bloomberg, since Sept. 8, when the Cabinet committed to the budget deficit target in Hungary’s 2008 international bailout. Orban will have to spell out how he will reach that goal to sustain the gains.

“What the market would like to hear are not deficit targets, strategies and accounting debates but concrete measures,” said Gabor Orban, who helps manage $4 billion in east European debt at Aegon Fund Management in Budapest.

The Fidesz party, which won two-thirds of the seats in parliament during April elections, can extend that control to city councils across the country this weekend. The government has held off presenting details of its 2011 budget, which may cut local spending to meet deficit targets, during the campaign.

Fidesz was backed by 37 percent of voters nationwide, compared with 11 percent for its nearest rival, the Socialists, in a Szonda Ipsos poll published Sept. 28 in the daily Nepszabadsag. The party may win an outright majority in Budapest for the first time since the fall of communism, according to the survey of 1,500 people conducted Sept. 16-24. The margin of error was less than 2.5 percentage points.

Local Cuts

“It is no coincidence that the government’s inability to decide on fiscal cuts has been strung out some six months, spanning the gap from national to local elections,” said Nigel Rendell, an emerging-markets strategist at RBC Capital in London. “Imposing swinging cuts in local expenditure will be no easy task.”

Some investors are concerned that strong voter support this weekend may give Orban the mandate to continue his rhetoric about ending five years of austerity to spur economic growth. Hungary’s economic recovery from its worst recession since 1991 halted in the second quarter.

“The result can become a point of reference to justify the current direction,” said Ferenc Kumin, a senior analyst at the Szazadveg research institute in Budapest. ‘There will be new items on the agenda after the election with the start of the budget debate, but the style and line of the government will probably stay.”

Domestic Politics

Domestic politics have put Orban in conflict with investors since the parliamentary campaign, when he accused his predecessor of lying about the budget.

Credit-default swaps on Hungary’s bonds surged to a one-year high of 410.24 basis points on June 4 after ruling-party officials said the previous government had put Hungary at risk of a Greece-like crisis. The cost of insuring the nation’s debt fell to 327.61 basis points yesterday, the lowest in more than two months, according to data provider CMA.

The forint fell to a record-low against the euro July 19, when the IMF and EU ended a review of Hungary’s bailout without endorsing the government’s plan to widen the budget deficit to stimulate economic growth.

The government surrendered to EU pressure on Sept. 8 and accepted the previous Cabinet’s commitment to reduce the shortfall to 3 percent of gross domestic product next year.

Rating Under Threat

To convince investors it can meet that pledge, the government must present spending cuts and revenue increases totaling at least 200 billion forint ($984 million) in 2011, on top of a special bank tax approved in July, according to Aegon’s Orban, who isn’t related to the premier.

“There’s a clear need for the government to lay out a medium-term fiscal plan detailing how the deficit and debt issues will be tackled,” said Neil Shearing, chief economist at Capital Economics in London.

The deficit pledge hasn’t removed the threat to Hungary’s credit rating because the government hasn’t clarified its economic policies, Standard & Poor’s and Moody’s Investors Service said Sept. 15.

S&P lowered the outlook on Hungary’s BBB- rating to negative in July and a one-step cut would reduce the grade to junk for the first time since 1992. Moody’s is also reviewing Hungary for possible downgrade, though it rates the country Baa1, two steps higher than S&P.

“The government needs to tread very carefully because S&P could pull the trigger,” said Bartosz Pawlowski, a London-based emerging-market strategist at BNP Paribas SA. “This is the most clear and important risk at the moment.”

Hungary’s goal is to ensure that the country’s credit rating improves, Mihaly Varga, Orban’s chief of staff, said yesterday. The government wants to follow an economic policy that fosters growth while “ensuring a sustainable fiscal balance,” he said at a conference in Szeged, Hungary.

“It is our aim to turn around the current trend of Hungary being the only country in central Europe that has seen its credit rating deteriorate in the past years,” Varga said.

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