BUDAPEST (Reuters) – Hungarian car dealer Realszisztema has shelved plans to build a $1.7 million service facility and warehouse. Auto supplier AGC Glass Hungary, too, is turning away from expansion ambitions as it faces a future of fewer workers and sliding sales.
The companies are part of an auto industry that until recently had been a mainstay of a strong Hungarian economy, and a sector that Prime Minister Viktor Orban has hailed as a testament to his stewardship of the nation.
Realszisztema and some other Hungarian companies weathered the first wave of the COVID-19 pandemic reasonably well. But now they are preparing for a second wave, which has injected a renewed sense of uncertainty into their business plans, and the economic fallout is expected to stretch into 2021 and beyond.
Hungary’s weakened prospects could represent the biggest threat to Orban’s decade-long rule as he prepares to face parliamentary elections in the first half of 2022.
Orban, whose stated aim has been to transform his country into an “illiberal democracy”, has drawn censure abroad with his anti-immigration rhetoric and sweeping reforms that have earned him accusations of authoritarianism from the European Union. He has denied these accusations.
He has nonetheless enjoyed enduring popularity at home, winning three straight terms to become Hungary’s longest-serving post-communist leader, and has repeatedly shown his ability to bring tens of thousands of supporters onto the streets.
However he has long relied on the economy as a major vote-winner, with strong financial support for families, and has emphasised his role in helping develop industries such as autos and overseeing the growth of a large ecosystem of suppliers around car factories.
“One of the main reasons why Orban’s supporters back his Fidesz party is its economic legitimacy. A sense that Fidesz can run a competent economic policy,” said Andras Biro-Nagy, a political analyst at think-tank Policy Solutions.
The Hungarian government did not respond to a request for comment for this article.
In recent years, the premier has said that Hungary’s auto industry was on track to become a regional hub. Even in June this year, when the country looked to have successfully beaten back COVID-19, he gave a rousing speech from a car factory.
“We are in the citadel of Hungarian industry. This factory is the pride of Hungarian industry.” he said. “We are also somewhere important in terms of the national economy.”
However both this sector and the wider economy are looking more precarious, with little certainty about the future, potentially robbing the premier of a key electoral advantage.
Last year, the economy expanded by almost 5%, year on year, while the booming car sector increased output by more than 10%.
This year the economy shrank 13.6% in the second quarter, the deepest contraction in Central Europe, and is not expected to rebound until 2022 or 2023. Some 200,000 people have lost their jobs. Car sector output, meanwhile, was down more than 24% in the first seven months of 2020.
‘THE LAST STRAW’
Authorities warn of a second wave of infections towards the end of this year, and businesses are worried.
AGC Glass, for example, estimates its turnover next year will be 15% below 2019 levels.
“The size of the cake in Europe will be smaller and competition for each slice will be stiffer,” its human resources director Mihaly Giber said. “If half of the factory is put into quarantine, we will not be able to meet the demands of clients.”
Orban’s Fidesz party currently leads in opinion polls and it is unclear how long Hungary’s economy will be impacted by the virus or if voters in 2022 will hold him responsible for the economic consequences of a once-in-a-century pandemic, according to political analysts.
They say, however, that Orban’s hardline stance on immigration, which has been a big factor is his electoral success, is unlikely to dominate the agenda as in the past.
“The social aspects of handling the economic crisis will be key in the forthcoming period, that is, whether people start blaming the government for their deteriorating financial situation,” said Biro-Nagy of Policy Solutions.
Orban’s three-month furlough programme expired last month and there are no indications his government will resurrect it, with the budget projected to run a deficit worth 7% to 9% of economic output.
The central bank has exhausted most of its monetary firepower. “We must be prepared that a renewed deterioration of the outlook may be the last straw for lots of participants in the economy,” Deputy Governor Barnabas Virag told a conference last week.
“They may have tried to maintain their headcount but are now forced into layoffs, they have managed to service their loans … but now fall into delinquency, or delay investments.”
Companies large and small are hoping they will not be one of those participants.
Car dealer Realszisztema, based near Budapest, obtained a 1 billion forint ($3.3 million) loan under the central bank’s $5 billion pandemic funding scheme which, like many businesses, it used to refinance more expensive funding.
However, the interest savings were offset by a retail sector tax used to plug holes in the budget this year.
In a concerning sign for the future, just a third of the value of the loans taken up by businesses so far has been used for investments.
“If foreign tourism fails to recover, if entire sectors of the economy shift to a lower gear and foreign companies do not replace their fleet every three years, that could affect us,” said Realszisztema investment director Peter Karai.
After successive downgrades, the government now expects the economy to shrink by 5%-7% this year, by far the worst performance since Orban’s 2010 election landslide.
The premier himself spoke of the gravity of the situation a week ago. “We cannot afford the virus crippling the country again,” he said, ruling out another lockdown.
However some economists have raised concerns over a recent spike that has seen hundreds of new infections recorded a day since the end of August, with the total number more than doubling to over 15,000.
“The alarmingly virulent spread of the virus in early September does not bode well for a fully-fledged continuation of the recovery,” economists at Raiffeisen said in a note.
Hungarians became more pessimistic about the economy in September, a survey by the GKI think-tank found, mostly due to deteriorating employment prospects. That reversed a gradually improving trend since a nosedive in April.
“It will be late-2022 or early-2023 by the time we reach pre-crisis GDP levels and the slow recovery will largely stem from the labour market,” said economist Peter Virovacz at ING.
“(We will see) high or rising unemployment, a looser labour market, weaker wage growth and consumption also taking a hit.”
AGC Glass is not planning any expansion in the foreseeable future. Despite hiring about 80 people since the economy reopened, its workforce remains below pre-Covid levels.
Giber is concerned about the availability of workers as infections are rising. “If the situation in schools deteriorates and some parents need to stay at home with their children, that will hit the workforce.”
($1 = 301.99 forints)
(Reporting by Gergely Szakacs; Editing by Pravin Char)