Do markets do more than just punish?

Gábor Orbán
Macroeconomic analyst and Head of CEE Fixed Income

Much has been written, in many places, about the past few months’ deterioration in Hungary’s fundamentals; however, it’s a little known fact that the stark disparity between Hungary’s performance and that of its peers is due, in equally large measure, to the macroeconomic success story of our regional competitors, notably the Czech Republic. Of course, the positive Czech example is nothing new: as far back as in the 19th century, unlike their Hungarian counterparts, the Czech elite typically preferred other means of risk assumption to the card table and horse track… The strong vein of thriftiness remains to this day, which is why the Czech Republic is commonly, and for good reason, referred to as the “Singapore of Central and Eastern Europe”. This year, however, there is more to it than simply the Czech Republic’s excellent general creditworthiness. At the beginning of the year, for example, we noted with concern the country’s growing financing requirement as the economy tried to pull itself out of the most severe recession of the past two decades, and found itself faced with falling tax receipts accompanied by rising costs. In July, however, the new government led by Petr Necas, the first in many years to enjoy a legislative majority, introduced measures aimed at substantially reducing the budget deficit, which according to plans will be set on a downward curve in the coming years, to be halved in the space of three years. The entire program is made even more credible by the fact that it promises a substantial improvement as early as next year, as a 10% reduction in government payroll costs, the slashing of maternity and unemployment support and the cancellation of previously announced tax cuts will result in savings totalling CZK 74 billion, or 2% of GDP.


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