Market Wants Early Elections In Hungary

The fund managers and analysts surveyed, however, do not believe early elections will actually take place. If they do, some market turbulence may ensue.

Portfolio.hu tested the waters on the market by drawing up four possible scenarios, which were as follows:

I. The coalition parties reach an agreement within a month, and Ferenc Gyurcsány remains PM for the time being.
II. The coalition parties reach an agreement within a month, and governing continues with a new PM until 2010.
III. Minority government: MSZP acquires supporters from the outside.
IV. Early elections.

We put five questions to the analysts and fund managers.

1. Which scenario is the most likely to materialise?
2. Which one of these would be the most favourable in respect of Hungary's medium-term stability?

What implications certain scenarios would have in the short run (1-2 months)
3. ... on the stock market?
4. ... on the forint market?
5 ... on the fixed income market?

Aspirations and reality

The answers to the first question were rather unequivocal. Answers were coming in between late Tuesday and late Wednesday, and the more information about the parties' row were being brought to light during this period the more certain the market was growing that the Scenario III. (minority government) will materialise.

The probability of this came to 7 on a 1-10 scale.

The respondents find the ousting of Prime Minister Ferenc Gyurcsány and a backroom deal between the Socialist Party (MSZP) and their junior ally, the liberal Free Democrats (SZDSZ) highly unlikely (Scenario II.)

It is still early elections that the economists find the least probable outcome, which notion is supported by the assessment of political analysts.

Meanwhile, the experts believe it is exactly this last scenario that would be the best for the country.

Out of the 22 respondents 13 said early elections would be the most favourable solution to the current crisis. Six believe a minority Socialist government would be the most advantageous answer to the current woes, while the rest of the respondents (mostly foreign analysts) voted for the other two, “less radical" scenarios.

The aforementioned are clearly reflected in the consensus, as well: only the early election scenario got more than 5 points on the 1-10 scale.

The outcome of the poll may seem shocking at first sight. The only realistic stake in case of early elections appears to be how badly the opposition (the centre-right Fidesz) would beat the current cabinet. Note that in a poll conducted by Portfolio.hu at the end of January, the market flatly rejected the opposition-initiated referendum, with remarks like this: “What is happening right now is that we're throwing a lot of money out the window, and we drop an atomic bomb on the seeds of social self-care so that for Pete's sake no one would stop dreaming about the return of the Kádár regime."

The market now believes, however, that any other solution would lead to years without progress and the respondents are upbeat about the economic results that new elections would spawn.

“The first three options would hamper any further substantial measures in the direction of long-term stability and growth for two years. In other words, it would be two years wasted," one of the analysts opined.

“This would be an impermissible luxury for Hungary, as it has a huge backlog in the region with regard to both competition and growth, so even early elections may prove to be a better solution."

“If Fidesz showed willingness to carry out a similar fiscal adjustment, the best possible option would be snap elections as soon as possible and a two-thirds victory by Fidesz. Under that scenario there would be no need for the so fervently (and seemingly hopelessly) craved agreement (between MSZP and SZDSZ), basic laws could be easily amended and they wouldn't have to care about popularity figures anymore," the analyst said, basically summing up the consensus viewpoint.

There are doubts, no doubt about it

All the above do not mean, however, that uncertainty has simply vanished from the market. Several analysts underlined the ambiguity of the performance of Fidesz both as a governing party and as the main opposition.

Fidesz had also chosen not to touch the big redistribution systems and its rhetoric was constantly rather demagogic over the past years, a number of analysts said, acknowledging that the aforementioned scenario carries the biggest risks.

Nevertheless, the track record of Fidesz is good despite its rhetoric, at least considering the fact that Hungary's public sector deficit was the smallest under their term and they implemented a slow fiscal tightening in a way that it was not really picked up by the public, another expert noted.

Uncertainties about this scenario may stem from the fact that the respondents projected the largest market turbulence in case of early elections.

“While early elections could underpin stability in the longer run, market reactions will definitely be negative in the short term," one of the analysts said, and the consensus shows that the majority share his view.

This outcome would make its impact felt on both the forint and the fixed income market, although the extent of fluctuations is thought to be limited.

According to the forecasts provided, the HUF would not ease more than 4% against the euro and the fall of the BUX index would remain below 5%, while yields are seen rising by no more than 50 basis points. (These were the smallest shifts the respondents could choose.) This contradicts the vision of some economists from the past days that predicted capital withdrawal over political uncertainties.

In the chart below you can see the distribution of answers to the first two questions in the “probability/expected outcome" space. (In practice, you can see the grades given to the first two questions.) 

The highest probability given to the formation of a minority government is underpinned also by the fact that the market reaction to this scenario is expected to be neutral. This is not only because risks have already been priced in, but also because the respondents do not find this outcome catastrophic either. Altogether they believe that outcome would be a continuation of the current situation, but due to the “outside support" the Socialists need in Parliament pre-election spending could in fact be smaller than if the coalition did not get divorced. Especially so if the person of a new PM failed to provide a sound enough guarantee for fiscal discipline, several analysts added.

“I'm a fan of minority governments. It worked out well for the Czech in 1998-2000 and the Polish between 2003 and 2004. They closed an era and lasted for long enough to help the public accept and digest the situation. After that a new framework for progress was formed on a solid basis, with low inflation and a stable budget," a market player told Portfolio.hu.

“In Hungary this (a minority government) does not mean that reforms will screech to a halt, since there wouldn't have been any anyway. It could mean, however, that purse strings will not be opened wide, at least it is not in the interest of the majority in Parliament to allow MSZP to boost its popularity."

While - as we have signalled - this is not the consensus opinion, several respondents apparently shared this view. This way we can identify one positive and one negative message of this survey:

+ The market is not concerned about the implications of the currently most likely scenario, a minority government, so its impacts could also be limited. Moreover, this is by far not the worst solution with regard to fiscal discipline.

- This outcome will not allow Hungary to avoid another two years of no progress and there is not much chance for early elections."

Source: Portfolio Online Financial Journal