Tuesday, April 19, 2005

Hungary gets new Finance Minister

Over at Serious Topics the other day we were discussing the Hungarian budget deficit, the fact that the deficit is financed mainly in foreign currency, and the general economic situation. Also see Hungary calm before the storm at Morgan Stanley for some more background on this.

Hungary has been singled out by the European Commission for failing to bring its deficit under control, as can be seen from the mention in the previous post’s quote.

The situation is as follows:

Budget deficit = 4.4% of GDP
Current account deficit = 8.9% of GDP
Government debt = 60.7% of GDP

Yesterday the Finance Minister was changed however I remain unconvinced that this change is anything more than cosmetic – the fundamental problem is one of a need to curb spending and / or increase government revenue. The governing Socialist led coalition is unlikely to propose tax increases in any shape or form with only a year to go before the next parliamentary elections. Spending cuts are going to be difficult – the bureaucracy here is bloated to say the least, a hangover from the Communist system. Putting scores of civil servants and other public sector employees out of work isn’t going to generate much in the way of votes.

Furthermore there is already a cry of “nincs penz” (no money) for even the most necessary of public expenditure so the room for cuts is limited to say the least. Austerity may be required but at the same time there remains a requirement for essential public spending to bring some areas, hospitals and doctors salaries for example, up to something more or less resembling European standards. I personally see no change to the situation in the near future, and as the new incoming Finance Minster, Janos Veres, was quoted as saying yesterday “There is no need for austerity measures, and the fulfilment of the convergence programme should be continued”.

Below is an overview from Hungary Around the Clock – but personally I would be surprised if the much talked about reform programme materialises this close to an election.

Gyurcsany sacks Draskovics
Prime Minister Ferenc Gyurcsany yesterday fired Finance Minister Tibor Draskovics and announced that Socialist MP Janos Veres will replace him from April 25. In explaining the move, Gyurcsany said Draskovics is not being sacked because of the budget deficit, but because he wants stronger support from the Finance Ministry. “We will break through limits, which were taboo before, for which the political and professional support of the governing parties’ MPs is necessary,” said Gyurcsany.

Veres was hitherto Gyurcsany’s chief of staff. He will be succeeded in that role by Interior Ministry administrative state secretary Gyorgy Szilvasy, a long-time confidant of Gyurcsany, Napi Gazdasag writes.

“There is no need for austerity measures, and the fulfilment of the convergence programme should be continued,” Veres said.

Draskovics himself observed that Gyurcsany has realised that the reform of state administration can no longer be postponed, because without it no permanent economic stability is possible. Draskovics blamed his fall on the central bank’s failure to adequately support the government’s economic policy and on the lack of political support to push through substantive reforms.

Speaking later in the Netherlands, Gyurcsany said it was necessary to fire Draskovics as the government wants to pursue a new and more courageous policy and enhance professional and political confidence.

Veres is the ideal man to carry out the 100 steps programme announced by the Prime Minister at Friday’s Socialist Party conference, deputy caucus leader Istvan Gondor observed. He explained that Veres has considerable support within the party, is a seasoned budget expert, and is well versed in the entrepreneurial sphere.

Other observers also suggested that Veres’s good standing within the Socialist Party makes him better suited than Draskovics to push through reforms, as Draskovics is not a member of the party. Draskovics, as a former administrative state secretary, remained an “office clerk” in the eyes of the Socialists, who did not regard him as capable of carrying out reform, Magyar Hirlap writes.

Citing other possible reasons for Draskovics’s departure, Magyar Hirlap notes that the tax reform commission supervised by him was unable to produce any substantive proposals for changes in its report earlier this month. Moreover, he did not get along with Gyurcsany and it was only international pressure that kept him in place when Gyurcsany became Prime Minister last year, the newspaper adds.

The change was driven by political forces, as Veres better fits Gyurcsany’s plans, according to analysts from Budapest Economics. Barclays Capital strategist Jeff Gable said the market expects a detailed plan from Veres.

Fidesz chairman Viktor Orban called the dismissal of Draskovics an admission of the fiasco of recent times, an admission that things cannot go on like this. In Parliament, Fidesz caucus leader Janos Ader said that during Draskovics’s 14-month tenure state debts rose by Ft 1,200 billion, while the budget deficit reached more than 47% of the target for the whole year by March.

Free Democrat leader Gabor Kuncze said confidence no longer existed between Draskovics and Gyurcsany, nor between the Finance Minister and the Socialist Party, and in such a situation a change is necessary. “We expect Veres to spearhead reforms,” he added.
Here is a link to a brief overview of the new Finance Minster, Janos Veres A former Communist like the Prime Minster he is also pretty wealthy by local standards. It is always interesting to see how rich many ex-communist party members have become since the change of political system ...... I suppose it’s something to do with being in the right place at the right time ....