Luckiest Finance Minister in Central & Eastern Europe – Mihály Varga

Hungary’s economy minister Mihály Varga has been named “Finance Minister of the Year, Central and Eastern Europe 2015” by London-based Euromoney Emerging Markets magazine. Government media in Budapest and the Hungarian Embassy in Washington are praising Mr. Varga and the ruling Fidesz party is elated by Euromoney’s choice. Is this another example of Prime Minister Orbán’s successful economic policy?

Mihály Varga, luckiest Finance Minister in Central & Eastern Europe.

Mihály Varga, luckiest Finance Minister in Central & Eastern Europe.

Many of us remember that in 2010 Hungary’s central banker, András Simor, received the “Best Central Banker in the Emerging Region” award from the very same magazine. At that time, Fidesz attacked Mr. Simor, demanding his resignation. Prime Minister-elect Viktor Orbán lashed out against the central bank. Fidesz Vice Chairman Zoltan Pokorni accused him of fraud. And Fidesz party officials questioned his bank’s activities and claimed that financial regulators were not doing their jobs properly. Mr. Simor refused to resign.

You might ask: Are Euromoney’s awards credible? Well, some say that Hungarian government spends heavily on ads in the magazine and also sponsors events. Mr. Orbán himself published an article in 2013 in a paid supplement and Mr. Simor and Mr. Orbán both spoke at sponsored Euromoney conferences. Many of us think that Mr. Simor’s award was a mistake in 2010. While Mr. Varga may or may not the best Finance Minister, undoubtedly he is the luckiest.

Viktor Orbán spoke at Euromoney Conferences.

Viktor Orbán spoke at Euromoney Conferences.

There is one specific reason why Mr. Varga received this award; it was his perfect timing of the forint conversion of Hungary’s foreign currency mortgages. The conversion happened before the Swiss Central Bank decided to let the franc rise substantially. His timing was pure luck.

Hungary’s overall economic policy is on the wrong track. True, there are some bright spots and monetary policy is one of them; it has improved under the Orbán administration. As a long-time observer and critic of previous Prime Minister Ferenc Gyurcsány’s central bank and monetary policy, I must admit, that I agree with several changes and policies initiated by the Orbán government in this area.

Mr. Gyurcsány’s long time finance minister János Veres was unqualified. I was horrified to learn about his off-balance-sheet bookkeeping trick in 2005 when he wanted to falsify EU reporting of Hungarian highway finances.

György Szapáry, later Hungary’s ambassador in the US, had some common sense and publicly raised his voice. Mr. Gyurcsány’s central banker Mr. András Simor was not much different. His policy actions were erratic and many of us thought that he was incompetent. Mr. György Surányi, the respected Hungarian economist has published an excellent analysis and critique of his tenure – Téves diagnosis, téves terápia. (Read here)

In the last couple of years Mr. Varga introduced extraordinary tax measures on banks, telecom firms, energy companies and retailers. These policies were unnecessary and controversial; they are not helping the long term business climate in Hungary. At the same time, it is undeniable that in the short run Hungary was able to achieve GDP growth of about 3.6% last year. Exports and current account surplus are high, investment and consumption have risen and inflation has fallen. There are signs of life in private sector jobs growth and deficit was below 3% in each of the past three years.

The fundamental problem is that the country’s debt load is sky high. It is still 77% of the GDP, stubbornly high and I don’t see it falling. In 2010 Mr. Orbán promised to reduce it; he failed. The country’s bond rating is still “junk”, below investment grade. Also, Hungary’s largest companies are non-transparent, nobody knows how OTP Bank and MOL Group are really performing. Hungary’s manufacturing is overly dependent on Germany’s car industry. If VW or Mercedes sales drop in the future, Hungary might be in serious trouble. As US rates begin to rise Hungary won’t be able to continue its current level of growth.

Having said that, Mr. Varga’s luck deserves credit. His crowning achievement was the gutsy conversion of $12bn in foreign currency mortgages, mostly Swiss francs, to forints in November last year.

He should have gotten the “Luckiest Finance Minister” award from Euromoney.

György Lázár

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