A single final solution to the problems of Hungary’s foreign currency debtors would be amazing, but it became clear in the past two years that no such solution exists, Economy Minister Mihály Varga told Portfolio.hu in an interview. The remedy will likely consist of several stages and only the existing means should be applied to assist distressed FX borrowers, he added. Varga said local energy service providers survived the 10% reduction to retail energy tariffs, adding he hoped the cabinet did successfully lower their profits because they had ample reserves in this field.

Varga acknowledged that revenues from the financial transaction tax came in lower than planned so far, but said it would be too early to talk about a hike to the rate of the FTT. Overall he believes public finances are in order this year therefore no additional fiscal adjustment package is being considered. If it turned out Budapest still has to take corrective measures to meet its deficit target, it would come up with these already in the spring in order to ensure the country’s exit from the EU’s excessive deficit procedure (EDP).

Varga said one of his key tasks is to kick-start growth, because the possible introduction of a negative tax or a new job protection action plan aimed at fostered workers next year depends on whether or not output can grow. He also noted that the central bank (NBH) could use the tool of purchasing government securities on the secondary market.

The key tasks

Varga said he had "several longer discussions" with Prime Minister Viktor Orbán about the tasks he will need to attend to and so these are clear for him. These tasks include Hungary’s exit from the EU’s excessive deficit procedure (EDP), boosting economic growth, reaching the budget deficit target, solving the problems of foreign currency debtors and there are also some minor correctional tasks in the area of finances and taxation.

"This year, it is a highly important task to be able to exit the excessive deficit procedure. It may be even more important to start economic growth. [...] The two key tasks of economic policy are to promote economic growth and to maintain balance. These have been the key tasks of the Hungarian economy and economic policy for about 20 years now," Varga said.

Among the other important tasks he mentioned the increase of Hungarian ownership in the financial sector and, more importantly, providing assistance to foreign currency debtors.

"This is also part of the question how large manoeuvring room growth will give to economic policy. Everything roots here, in my view. The balance improving measures of the past two and a half years will mean something only if there is growth. Assisting FX debtors would only make sense if it does not hinder growth. So primarily we have to seek to kick-start growth and resolve the smaller issues in the meantime."

FX debtor woes cannot be solved in one fell swoop

The minister said "it would be great if there was a final solution" to the problems of those indebted in foreign currency, "but as it turned out in the past two years there is no such [solution]."

"Solving the problems of 1.7 million foreign currency debtors with a single idea is almost impossible. There can be only solutions that are split into parts. Beyond a certain point it must be important for the economy to have a functioning banking system that lends. That is why I’m of the view that the existing means need to be applied. We can have meaningful discussions about new tools only if we can agree with our partners, e.g. the Banking Association, on an acceptable compromise about these.

When asked whether additional measures could be taken that will affect the sector’s profitability, Varga responded that "there are many tools, but for now we want to use the existing ones."

He confirmed that the next area of debtors they plan to assist is those whose payments are overdue by more than 90 days. "[...] due to the potential vulnerability of the banking system this group could be the most important," Varga said, adding that this view is shared by the Banking Association and talks are already in progress.

Consumption may also help growth

Consumption also to shore up growth

With respect to the relation between the thickness of Hungarians’ wallets and economic growth Varga noted that "what can be saved up is usually saved up", adding that what people do not have spend on taxes will "sooner or later have an impact on consumption."

"Over the past two years we saw only a very moderate impact of this [private consumption], but in 2013 this could be one of the new elements of economic growth," he said.

The other two important areas where bigger contribution to growth can be expected is farming, where an average performance "would boost growth by 0.4-0.5 percentage points", and "an improvement in our export outlook," Varga added. He noted that these could be the main engines this year, "but I wouldn’t give up on consumption either," adding that in view of the favourable changes in confidence indices the government expects a moderate pickup in retail consumption this year.

Growth target remains for now, predictability is key

Asked about the cabinet still sticking to its 0.9% annual growth forecast for 2013 in the face of much more pessimistic estimates on the market, Varga said "for now we do not see a reason to change this growth prognosis. I expect growth between 0.5% and 1.0% this year," he said, adding that the first half should be weaker but the second half should already present stronger figures.

"By the way we are not alone with this view; some already say Hungary’s economic growth could surprise on the upside."

Asked what could be done about the most troublesome impact on the long-term growth outlook, namely the persistently descending investment dynamics, Varga responded: "Stability, predictability, transparency [and] consolidating economic policy."

Trying to reduce the cliché-like attributes of this comment he further explained that "if economic policy aims for predictability it will be predictable."

In his view, "one of the most important problems today is that it is difficult to make a business plan in Hungary. As economy minister I can help [in this respect] to give stability to economic policy that will hopefully allow these business plans to be born."

There is still "juice" in the energy sector

He added that the government is in talks with the Banking Association "because you can reach growth without the banks as well, but with them it is easier." The minister noted that if the HUF 7,000 billion corporate stock grew by only 1%, it would boost economic growth by 0.4-0.5% and state revenues would rise by 0.2% - "so everyone would benefit".

"Fortunately the Banking Association is also willing to try and come up with an agreement, in which the banking system would receive some kind of compensation, a tax break in exchange for an increase in their loan portfolio."

When confronted with the losses the corporate sector suffered on the different government measures and its constant fear that it’s not over yet, Varga responded that "the corporate sector as a whole was not disadvantaged by the adjustment measures. There are sectors which play an important role in the Hungarian economy, for instance, the vehicle and the pharmaceutical investments.

He also noted that parts of the services sector are facing "new challenges" not only in Hungary, but elsewhere in Europe, mentioning that energy tariffs decreased by 10% in Poland and Germany’s environmental minister is considering a 10% tariff cut, just like Hungary’s.

"This is a turnaround in trend in Europe, [...] we are starting to realise that [...] there are still reserves in the system [...] in the energy sector, for instance."

When asked for confirmation if he really thinks energy companies still have room for even smaller profits, Varga responded that "I’m not the one to decide it." He underlined, however, that "the sector did tolerate the 10% reduction of retail energy tariffs."

"As to when corporates will be able to plan more concern-free I can say that who paid attention to the measures of the past two years could see what directions Hungary’s economic policy is going. Now a new period lies ahead of us. We will be consolidating, refraining from meddling with the large welfare systems and we do not want to root up tax policy, either. It is the time for fine-tuning," Varga said.

No new financing model, only a wider array of tools

Remarks made recently by government officials indicated that the state wants to assume a more active role in boosting corporate lending, e.g. via the Hungarian Development Bank (MFB), Postal Services (Magyar Posta) or savings bank Takarékbank. Varga, however, tried to dissolve concerns that we should prepare for a new financing model.

"We should not expect a new financing model, but we could expect that a wider range of tools will be applied than earlier. Now that the leadership of the central bank has changed, they may understand it slightly better at the NBH what objectives the government has set," Varga said.

These tools, he underlined, are "not from the devil", adding that "the European Central Bank has been using means for a long time the NBH still doesn’t."

The referee needs to kick the ball sometime

He said it was an "important step" that the state bought back E.ON’s local gas business, for this way Hungary "could sit to the negotiating table" and avoid having "a German or a Russian company agree on what price natural gas could be sold in Hungary."

"For the interest of the public the state does have to take steps to affect market conditions. It is not like what many were saying over 20 years that the referee is out on the field and applying the rules he sometimes blows into his whistle. This referee must occasionally join the game to make sure the result is optimal for the community."

Asked whether we should expect additional nationalisations, Varga responded that there has been no such thing, "the agreements were always made on market conditions. Obviously, we always seek agreements that pass even EU scrutiny."

Answering a question whether the government is considering taking additional assets into state ownership, Varga responded: "Naturally. Why would we exclude this? We want mutual agreements that are based on co-operation."

Asked about a market view that the state first delivers hits to the energy companies’ profits in a bid to later acquire them, Varga noted: "I very much hope that we did lower their profits, because they had some reserve in that."

He reminded that over the past few years economic policy and the Hungarian Energy Office was not overly rigorous in their role to examine the costs of these companies. "There are some rumours how flexible or inflexible their costs were. There is a state authority that has not been fully fulfilling its function over the past years," the minister added.

No need for a "Varga package" but...

Adjustment package only if...

The majority of market analysts, international financial institutions and the central bank all believe that keeping the budget deficit below 3% of GDP is at risk this year. Asked whether he would be willing to conceive a "Varga package" to make sure Hungary exits the EU’s excessive deficit procedure (EDP), the minister responded: "I am willing to sign only such package that brings more advantages than disadvantages. A package that makes recovery even more difficult would make no sense."

Varga noted that the European Commission doubts that the revenue targets from the electronic toll collection system and the online cash registers will be met (these equal about HUF 170-180 bn), but reassured that despite the delay these both will be implemented.

With respect to the ETC "we are hoping that it will be a concrete revenue source from the second half of the year. The National Development Ministry the system will be tested in June-July. Connecting cash registers online [with the tax authority] is a simple story, testing is in progress."

Varga said that in line with a February government decision, switchover will be gradual. Some cash registers will be linked to the NAV by 30 June, others by 31 December and for some were allowed to replace their offline cash registers by 2015.

Too early to talk about FTT rate hike yet

He also reminded that Brussels questions the accuracy of the revenue targets, saying economic growth turned out to be smaller than what the government had expected and so the target will be undershot. "Only time will decide how sound this [prognosis] is. As far as I can see the revenues, there is no major slippage at excise taxes and VAT, only at the financial transaction tax.

The government indicated earlier that if revenue targets are persistently undershot, the rate of the financial transaction tax (FTT) may be hiked. Asked whether this was a possible scenario, Varga responded that "it is too early to talk about that."

"The Banking Association had made a deal with the previous Economy Minister which said we will examine a raise to the rate of the levy in case of a revenue slippage. We will consult with the Banking Association to see what they believe the reason for this was. The slippage recorded in FTT revenues so far cannot be a reason for us not being able to exit the EDP."

Varga also said the Hungarian economy is "a bit on a forced path", because in the period up to 2010 "we rather significantly exhausted our possibilities that were available for cuts on the spending side [of the budget]."

Asked why a new adjustment package would have a more growth-friendly structure now that the cabinet has fewer possibilities to further lower spending, Varga responded: "We are not planning a package [...]. We are saying that for now there is no need for us to think about such a new package either because of the excessive deficit procedure or the lower-than-expected economic growth last year. The time for that may come, but let’s see it first what the first-quarter figures show."

If needed, corrective measures will be ready in the spring

In order to be let out of the EDP the EU executive will need to project Hungary a budget shortfall of less than 3% of GDP for the following years, which means Budapest has about one more month to convince the Commission that the EU threshold will not be breached.

In this respect, Varga said the government is working "at full steam" on the Convergence Programme that needs to be submitted to Brussels in April. He said this document will determine how the Commission’s May assessment and then the decision on the EDP in June will turn out.

He said he expects "the time-proportionate fulfilment of the shortfall, the situation of the general government and perhaps even the economic performance will confirm that the year is [progressing] on schedule."

Varga made it clear that if the Commission had a different opinion about the deficit, the cabinet will act quickly, already in the spring.

"If we find it necessary to take measures worth 0.1, 0.2, 0.3% [of GDP] or some other, we will certainly get round to do it. After only two months it does not seem [necessary] yet."

Cabinet not interested in weak forint

Asked how a considerably weaker forint would deteriorate the budget balance (if it stayed that weak throughout the year), Varga responded that the exchange rate "has only a very indirect impact on the budget. Basically, we do not expect a major deviation either on the revenue or the expenditure side. We are in a special period of the year and I expect the [forint] volatility to subside. Troubled waters will calm down, as nothing happened fundamentally in the Hungarian economy that would justify this depreciation."

A torrent of verbal interventions by government officials to shore up the forint failed to exert a lasting impact. In this respect we asked the minister whether we should expect specific government measures if the HUF eases close to its previous record around 320 to the euro.

"The market uncertainty starting in the second half of February is attributable to the change of leadership at the central bank. These [things] will fall into place. We have limited possibilities to affect the forint exchange rate, basically we need to let market impacts run their course. The Hungarian cabinet would have an unfavourable influence on the forint exchange rate if - insisting on a very tight range - it would constantly keep the possibility of intervention in the air. Let me stress it once more that the Hungarian government is not interested in having an overly week forint. At this degree of foreign currency exposure we have in the country a weaker forint rate would bring more losses than benefits."

Let's not assume the worst

The nominal growth of Hungary’s gross domestic product is most likely be smaller in 2013 than previously expected. The latest estimates indicate that even if the deficit is kept below 3% of GDP, the country’s debt ratio will not necessarily decrease. Asked what the cabinet can do about this Varga responded that "we would like to keep the target laid down in the fundamental law [...], adding that the Stability Act stipulates that these numbers need to be revised annually. The next revision is due in the summer, he said.

"If the performance of the Hungarian economy is better than what we had envisaged and the debt level is different from what Parliament approved last December then the government will certainly take steps," the minister said.

Asked whether the budget shortfall could actually undershoot the target, he responded: "I cannot exclude that either. Let’s not start from the most pessimistic scenario and trust that growth will come in as planned."

It also hinges on growth whether the cabinet can introduce the promised higher wages for teachers in the autumn, the minister noted.

With respect to the second job protection action plan, Varga noted that it will focus on fostered workers so that they could be integrated on the labour market. He said that according to the first estimates only about 10% of workers employed in the public work scheme can return to the labour market and this is what needs to be improved.

Taxes, co-operation with the central bank

Not perfect tax moves

Asked where his discontent lied with regard to the tax system, e.g. transparency, tax hikes or the increase in the number of taxes, Varga responded that firstly it was the "number of changes that was unjustifiably high", especially in 2011.

"You need to be extremely cautious when you alter the tax regime; no one likes when they are reaching into their pockets, whether it is a company or a private individual. There is scope only for very cautious and consistently calculated modifications."

The minister said he was also dissatisfied with the precision of planning, as there were slippages in tax revenues both in 2011 and 2012. "This year the smaller taxes are to generate smaller revenues. In this front the professional work of the ministry must be enhanced at all cost."

No 35% VAT rate on luxury goods, no reverse charge VAT extension allowed

Asked whether the ministry wants to boost revenues also by introducing a 35% VAT on luxury goods, Varga responded that they have already requested information in this respect from Brussels and "current EU rules do not allow the introduction of such a tax rate." He also said he sees "no way forward" on this matter.

Varga also said a reduction of VAT on basic foodstuff remains on the agenda. "[...] there are experiences in this area and these are not overly good," he said, reminding that neither the 2005 VAT cut proposal nor the ones before that lived up to expectations.

The minister noted that "when you want to get out of the excessive deficit procedure you need a very good reason to give up tax revenues."

Hungary applied for the extension of the reverse charge VAT to swine trade, but Varga said Brussels rejected the application so the mechanism will not be implemented in April as planned. He noted, though, that if the mechanism can be extended to other sectors in agriculture the government will do it.

Co-operation with the central bank

Asked about the areas of the often mentioned strategic co-operation between the cabinet and the central bank, Varga said "co-operation is already a lot stronger if we have the same view on specific things."

"Former central bank Governor András Simor said several times he had limited means to stimulate growth. We have raised different issues several times, such as corporate bonds and a stronger presence on the secondary government securities market," he added.

We have reminded him that even the new NBH leadership said going to the secondary market is not recommended unless in a crisis situation. To that Varga responded that "the question is whether we consider the current period as a prosperous era or one that still shows the impacts of the crisis. I do not think we have reached the end of the story yet. This tool is applied by every central bank that is willing to help stimulate economic growth. You can find several examples both within and outside Europe, so this should be considered. A decision in this regard is at the central bank’s jurisdiction."

(Portfolio.hu)