Abstract
The state of the Hungarian economy was expected to be a key issue in assessing
the country’s security
and socio-political stability in 2009.
Hungary, already heavily indebted, was hard hit by the global
financial
crisis in October 2008. Faced by a run on the forint, the Hungarian Central
Bank sharply raised
interest rates (by 300 basis points to 11.5%),
intensifying a lack of liquidity throughout the economy. The
International
Monetary Fund (IMF) and the European Union assembled an emergency financial
rescue
package worth US$25.1bn. A number of analysts were forecasting a
recession in 2009, with the
government itself predicting that GDP would
contract by 1% and others projecting a larger fall. BMI is
projecting a
0.8% GDP contraction. This would make Hungary the worst performing Central &
Eastern
European economy in 2009, as most of its neighbours were expected
to continue growing, although at a
slower rate than in 2008. The minority
government under Prime Minister Ferenc Gyurcsany was able to
get a new
budget and tax laws through parliament but was expected to face a range of
pressures to
increase spending along with protests from trade unions over
job losses. The government’s approval
rating had dropped to only 20%
in November 2008 but Fidesz, the main opposition party, was not faring
much better, with an approval rating of 29%. The budget committed the
administration to cutting the
fiscal deficit from 3.4% of GDP in 2008 to
2.6% in 2009 but in December under pressure from organised
labour the
administration said it would pay an extra HUF112bn (US$540.2mn) in 2009 as
part of a wage
offset plan to compensate workers for losing an extra
month’s pay as one of the conditions attached to the
IMF rescue
package. Analysts were concerned that more concessions would be made as the
2010
parliamentary elections approached.
The impact of the domestic
economic crisis should not be underestimated but the fact is that it has not
had
too much of a negative effect on the country’s defence and
security fundamentals. It is true that the fiscal
squeeze has affected
spending in this area but Hungary enjoys a low level of security risk. The
country
has an implicit interest in the transition and developments in the
Balkans, Ukraine and Russia. There are
currently no major regional issues,
although the security and human rights of Hungarian minorities in
neighbouring countries remains a priority. Hungary pursues a policy of
integration with regional and
multilateral security organisations,
achieving membership with the North Atlantic Treaty Organisation
(NATO)
and the EU and nurturing alliances with global powers. The risk of
international terrorist attacks
has been greatly reduced since the
withdrawal of Hungarian troops from Iraq.
Hungary has one of the smallest
defence industries of the Central and East European countries. In order to
survive in the long run, defence companies will have to specialise further in
niche capabilities and
strengthen their role as suppliers for big
international prime contractors. Hungary’s moves to modernise
its
defence forces and achieve full integration with NATO should create
procurement opportunities in the
coming years. Military expenditure has
been drastically cut over the last decade, largely as a result of the
strain on government finances from EU membership and the need to reduce the
overall budget deficit but
is expected to now increase in the long term as
the armed forces modernise and acquire new technologies.
Recently, Hungary
has been receiving heavy criticism from NATO for falling behind its
commitments.
Hungary is pushing through painful domestic reforms with only
limited popular opposition. Budapest is
improving its relations with
Europe and Russia – to the worry of some European analysts – and
is
extending its focus further away towards China and, of course, to the
US. Threats to Hungary have
reduced with its entry into NATO and the EU,
furthering its military and political stability. Its armed
forces are
modernising to ensure NATO compatibility and its small defence industry has
undergone
significant transitions and emerged with an industry that looks
very different but still has much to say for
itself.
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