Inching close to the medium risk range, the political risk index declined by 2 points to 64 points, while the economic risk index plunged from 52.6 to 45.5 points, continuing to indicate a medium risk (with indicators arranged along a 100-point scale, a lower value indicates higher risk). Prepared by Political Capital Institute and Figyelő experts, these are the findings of a Country Report providing an overview of conditions in Hungary with contributions from leading Hungarian economic and political analyst.
The calculation of political and economic risks for 2008-2009 follows methods used in the past, although instead of limited to 2008, our analysis covers events of the past 18 months. Furthermore, this year more emphasis has been given to the region and the projection of potential future risks.
Political Risk Index (PRI)
Political risk in Hungary continued to increase in the past 18 months. This is due mainly to the persistent instability of the government, continuing even after the resignation of the minority government and the inauguration of the new administration; it remains to be seen whether the government will complete its mandate, how many of its proposals can be implemented and which of those will be preserved by the next government. A major risk is posed by a deepening divide between the Roma and the majority population, which has intensified in the past 18 months and threatens with further escalation. An increasingly institutionalized far right enjoying growing popular support may add fuel to the conflict. Moreover, rampant corruption in the central bureaucracy and local governments presents a serious problem that, due to the imminent change of the guard, may become even more entrenched on both sides of the political divide. On a positive note, with measures aimed at the reduction of central redistribution, Hungary’s economic policy has taken a turn in the right direction, and since the country has little room for manoeuvring, it can ill afford to deviate from that course in the future. The upcoming general election may result in a more stable government, i.e., by 2010 the general political risk is expected to diminish.
Economic Risk Index (EcoRisk)
The economic risk index (EcoRisk) has dropped to the lowest level ever recorded, to an annual average of 45.5. At the end of last year, of all indicators the Hungarian economic growth index dropped to a dangerously low level: starting in the second half of 2008 it plunged close to 30 points and by the end of the year it sank to the worst (extremely high-risk) category. Looking ahead, in the second half of 2009 the growth risk may slightly improve, although this year Hungary is unlikely to climb out of the high-risk category. Already on a downward slope, the economic crisis has given the Hungarian labour market a further push. Paradoxically, despite last year’s significant reduction of the budget deficit, at the end of 2008 the stability sub-index remained in the high-risk range (38.2). Last year signalled the end of a state of grace where Hungary, despite having opted for the wrong economic model, was priced by capital markets in the medium to low-risk category. After the wheat had been separated from the chaff, the country was put in its rightful place: the company of markets with the toxic mix of low growth potential and high indebtedness, i.e., countries representing high risk.