How does Brexit affect the V4’s economic performance?

Two of the three major credit rating agencies have already improved their rating for Hungary. Csaba Lentner, an economist and college professor, talks about the reason behind the ratings, while Zsolt Feldman, State Secretary for Agriculture talks about the fundamental Hungarian interest that a new European political system.

The Hungarian National Bank announced a reform to improve competitiveness. Good evening. The goal is for Hungary to catch up to Austria in terms of economic performance. There is a constant debate on how long the Hungarian economy can continue to grow at a rate similar to in recent years. The prospects look good.

Two of the three major credit rating agencies have already improved their rating for Hungary. After Standard & Poors, Fitch Ratings also upgraded Hungary. At the end of last week, the international credit rating agency upgraded the rating of long-term government debt issued in foreign and local currency to BBB. The prospects of the new rating are stable. Fitch Ratings justifies, among other things, the move with the rapid improvement of the Hungarian external debt position. According to analysts, the upgrading of the rating was justified, because the Hungarian economy is growing in a balanced, sustainable and dynamic way.  Our guest today is Csaba Lentner, an economist and college professor.

Good evening.

What is the reason behind the fact that another credit rating agency upgraded the rating of Hungary, and what can be expected after these upgrades?

After the change of the government in 2010, the Hungarian economy stabilized financially and, following the change of management of the central bank in 2013, started to grow. I think that the two international credit rating agencies, which have already issued their 2019 annual ratings, were of the opinion that the Hungarian government’s debt has become significantly reduced. The reduction of the government debt is close to 15%. Net foreign currency debt was reduced from 55% to 10%. This is a huge improvement. In addition, the foreign currency portfolio was also exchanged from the corporate loan portfolio, and the population also got rid of foreign currency (Swiss franc) loans. Now financing happens in the local currency, which is safer. Also, loans of financing in the local currency have fixed interests rates.

Is predictability an important element in such upgrades?

Yes. Credit rating agencies examine how functional the state is: to what extent can foreign investors, who buy government bonds or invest FDI, expect a return on their investment? A return on an investment happens if the economic environment is safe and predictable. If an investor is concerned whether his capital or interests will be paid back on time—which is definitely a risk in Greece and Ukraine—then he is willing to invest rather in Hungary. There is a schedule as to when each credit rating agency checks up each country, and Moody’s will do their annual rating in May. I believe that this upcoming third credit rating agency will also upgrade Hungary’s rating. Consequently, a positive result is that government bonds will be bought at a lower interest rate, which means savings to the taxpayers.

Earlier we were happy if credit rating agencies did not downgrade Hungary’s rating, and now we are experiencing upgrades. Can it be quantified how much investment willingness in Hungary increases after such announcements?

To discuss FDI, I would go back a few years. When Hungary was placed in the catchpenny category right after the government change in 2010, the volume of FDI invested in Hungary did not come to a halt. On the contrary, it increased, despite the decision of the international credit rating agencies. We are very proud of the recent upgrade, and of course, of ourselves, but we have to see that foreign investors were not really influenced by the previous ratings. In the past few years, the prime minister or the minister of foreign affairs inaugurated a new factory almost every week, so FDI was coming to the country. This means that investors considered the tax system, the professionalism of Hungarian workers, and the return rates in Hungary to be positive, regardless of the ratings of the credit rating agencies. The real yield of the recent upgrade is that we can save a few tenths of a percentage on government bonds, which obviously translates to billions of forints.

The prime minister previously said that the Central European region will be the engine of the European economy, and now the Hungarian National Bank announced a program consisting of 330 elements to improve competitiveness. To what extent can we expect national competitiveness to grow based on the elements of the program? To what extent can the actors of the economy—small and medium enterprises, bigger companies—improve their own performance with the help of this program?

The prime minister entrusted the president of the National Bank, György Matolcsy, a year ago to keep up the momentum of the Hungarian economy that has been typical since 2010. This is only possible if the productivity and the efficiency of businesses increase. The problem currently is that the SME sector sometimes even struggles to carry out the raises of the minimal income. If these businesses receive government subsidies or preferential loans from the National Bank, then they will be able to improve their productivity, and thus be able to create the extra wages. So, the truth is that right now it is the private sector’s turn, not the state’s turn. Today, the Hungarian Chamber of Commerce held its annual opening ceremony, which the prime minister attended and said that despite performing greatly on the national level, businesses cannot sit back and relax but need to look for innovation opportunities to improve productivity. They will not be able to hire more workers; improvement can only be achieved by using their workforce in a smarter way.

One of the criteria is to achieve a spending of at least 2% of the GDP on R&D. Innovation is crucial in this area because it is one of the engines of development. However, EUROSTAT just published a report the other day which says that three Hungarian regions are lagging behind in terms of GDP per capita. This data suggests that there is room for improvement.

Yes, and I can cite the prime minister’s words again to answer this question. He said that Borsod-Abaúj-Zemplén, Szabolcs-Szatmár-Bereg and Hajdú-Bihar counties are the most critical in terms of unemployment rates. In these three counties, the ratio of public workers is the highest. So, FDI and other business investments need to be increased in these three counties, as well as in the southern part of Hungary. If these regions are more strongly capitalized, then they can move towards the national average and they catch up.

We have time for one more question. To what extent do political decisions in Europe, such as Brexit or the European Parliamentary elections, affect Hungary’s or the V4’s economic performance?

The Visegrád group is the engine of European economic development. This region is able to perform at two or two and a half times the growth rate of the European average, and it has strong financial stability. If Brexit happens, then the mass return migration of the Central European workers can be expected, which will improve the labor market here in our region. The other thing is that stakes are high at the European elections. It would be favorable if those political parties won that represent national interest instead of supporting immigration, because then families and households could continue to develop organically and dynamically while keeping their national characteristics.

Csaba Lentner, thank you very much.

Thank you.

As we said, political decisions have a great impact on economic processes. It is no coincidence that political leaders, among them, the leaders of the V4 countries, regularly meet to coordinate. Péter Szijjártó, minister of foreign affairs and trade just had a meeting with his Polish counterpart.

Brussels is pursuing revenge against Hungary and Poland, but Warsaw and Budapest can count on each other, said Minister of Foreign Affairs and Trade Péter Szijjártó after his meeting with his Polish counterpart. The Sargentini report discusses issues that were already closed with the European Commission in 2011–12, so it is obviously nonsense that they want to reopen these issues and that they want to initiate a procedure against Hungary on this basis. It is equally ridiculous that the European Commission has still not closed the procedure against Poland, although Poland has implemented all the amendments requested by the European Commission. Péter Szijjártó added that both countries stand up for their own national interests, express a direct stance in international debates and defend European Christianity.

The proposal that the EU community would penalize countries that do not meet the rule of law is not a new proposal. The possible sanction would affect the money paid to agriculture in the first place. My guest is Zsolt Feldman, State Secretary for Agriculture. I wish you a good evening.

Good evening.

How can the sanction be avoided that has been rumored in relation to Hungary? After all, some European politicians always want to put this punishment on the agenda.

Basically, every day we experience that many actors would like to acquire the common European agricultural funds, and they want to take them away from European and Hungarian farmers. It is therefore natural that it is a fundamental Hungarian interest that a new European political system be created that enables the allocation of these traditional and large European Union funds, such as development funds or agricultural resources, which are important for Hungary and for the Central and Eastern European, that is the Visegrád countries.

Within the V4, each agricultural chamber emphasized the need to ensure the continuity of EU funds. However, it is a big question how to calculate if we don't necessarily know the extent and distribution of resources.

Indeed, there are a lot of farmers and businesses that regularly receive some kind of financial support, as the Hungarian and European agriculture make a lot of effort for these resources. If there is uncertainty and question marks around the continuity of these resources, it will inevitably impair the ability to plan ahead. Today, Hungarian producers are asking what will happen after 2020. Therefore, on the one hand, we would like to reassure everyone that we are working on keeping the common agricultural policy and the Hungarian agricultural budget at the same level. On the other side, with many other Member States in various forums of the European Union, we are calling for solutions that focus precisely on the avoidance of fractures and on the continuity and predictability.

We'll come back to this topic a little later. Within the Visegrád group, Hungarian agriculture had the largest share of the total national product. Why is that the case? It is a very complex area: EU funds that farmers can apply for are very important, but national resources are also indispensable for people who not only want to make a living, but also want to give work to other people, and therefore want to innovate, invest and develop.

If we look at the current situation, we see that Hungarian agriculture accounts for about two percent of Europe's production. There are sectors that are in a much larger proportion and there are sectors that are smaller. Today, Hungary receives 3% of the resources of the common agricultural policy’s budget. Perhaps few people know that in the 2014–20 period more than 36% of EU funds coming to Hungary came to the country in the frame of the common agricultural policy. So, it does matter what these resources will be, and it does matter how we can use them.

However, if we look at the data on the food industry within agriculture, we are only in third place in the V4 group. How can this be explained?

When we look at agriculture, Hungarian agriculture accounts for 4.4% of the national economy, while the food industry has been somewhere around 2.3% on average in recent years. The Poles have strengthened much over the last two decades in terms of food industry, and we perceive this. In the case of the Czechs, the industry has traditionally been stronger, and this is why the food industry is also strong, but it is actually more or less at the same level as in Hungary. And Slovakia is behind us in this regard. We are basically suffering the consequences of the broken privatization process of the 90s, which essentially sold, then downplayed the domestic food industry. We are trying to rebuild this it in these years and in this government cycle.

By what means can the government help those working in this area or the whole of agriculture?

An important change in trend took place in 2014, as we began to provide more than 300 billion resources for the development of the food industry in various new forms in the current budget cycle, because development and enhancing competitiveness can essentially provide a more stable market for Hungarian agricultural products. On the other hand, it is essential to create a market and competitive production of good quality Hungarian food at home or abroad. So, these development resources are the keys to the current food industry.

Now that we are talking about Hungarian products, Hungary has had a great advantage: it has preserved its GMO-free status. However, the idea comes up from time to time that, after, for example, the European elections, they would like to change the law on gene editing again. Basically, the Hungarian interest says that we do not compromise on this. Can we or should we compromise?

Hungary does not give up its GMO-free status, not only because of the domestic consumers—who are otherwise the main focus of our thinking—but also for the preservation of export markets it is crucial to preserve GMO-free production and GMO-free cereal production. We are following the change in European regulation, so if we talk about genetic engineering, it is natural that if European legislation and the professional community regard it as GMO, then we will do so as well and will be as cautious and as careful as possible in that regard.

Yes, but there are some differences between the concepts. Hungary does not support any kind of genetic engineering and gene modification, but there are EU Member States who want to incorporate smaller modifications, say, to increase productivity, and we have already seen some attempts to do so.

This is a continuous professional debate about this technology, which on the one hand increases productivity, but on the other hand has unpredictable impacts on the environment and on us, and at the end of the day the question is: which one should we choose? We always put the health and safety of our environment and of people at the forefront, and we think that there are technologies that can exploit the technological revolution without genetic engineering and GMO to be more efficient and competitive.

With our previous guest, Csaba Lentner, we touched upon the question of what effect Brexit will have on the Visegrád Four and on Hungary. But, if we only look at Hungarian agriculture, either a hard Brexit or the United Kingdom's general exit from the EU will have serious consequences. What do you expect?

Our experience is that direct export is important but not decisive for Hungarian food exports. It is a much more problematic and challenging fact that the entire EU export to the UK is basically shrinking for either shorter or longer periods of time, and the food and commodities that do not go there have to be sold somewhere else. That's why cheese, vegetables and fruit sold in other parts of Europe are beginning to look for new buyers elsewhere on the European market, which will likely push prices down. This is very bad for Hungarian exporters and Hungarian agriculture. These are the indirect effects we prefer, but of course we are looking for solutions that will make the direct export path as easy as possible.

One can hear the aspirations in the European Parliament that the package affecting the EU's agricultural reform should be adopted before the election. Can this be prevented?

I think the first and most important issue is to have a good quality European budget for the post-2020 period. I think this is the most elementary Hungarian interest: quality budgeting, quality decision making. I think we can better represent this together with other Member States that have joined us with the cooperation of a newly composed European Parliament and a newly composed Commission. I am optimistic that at the end of the day a budgetary decision and policy decision will be made that is favorable for Hungarian agriculture and the Hungarian economy.

Concerning this issue, earlier, when the V4 met with Angela Merkel, Prime Minister Viktor Orbán said that all such decisions should be made only after the European Parliamentary elections. Can the unity that now characterizes the V4s be maintained, and can their lobby power be effective to have a say in the agriculture budget?

I think that there are more common than different interests, and these common interests can keep us together and bond us together as long as possible, and through that we can be successful in European decision-making.

Thank you too.

Dear viewers, thank you for watching the show on the Visegrád cooperation. We will be waiting for you next week. Have a nice evening and goodbye.

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