Viktor Orban Takes Economic Nationalism Too Far

Viktor Orban Takes Economic Nationalism Too Far

(Bloomberg Opinion) -- Even when they start out with reasonable economic policies, nationalists tend to take their pursuit of sovereignty too far. Hungarian Prime Minister Viktor Orban’s handling of Hungary’s public debt is a case in point.

In a major speech earlier this week, Orban outlined a plan to push Hungary toward its long-term goal of catching up with neighboring Austria in terms of prosperity. Apart from boosting population growth without resorting to migration, overhauling vocational education and increasing Hungarian investment abroad to equal foreign-owned assets in Hungary, the plan includes making sure that only domestic investors own the country’s public debt. That goes further than Hungary’s existing efforts to reduce foreign currency-denominated debt – and it’s a self-defeating move for a government that has largely managed to refrain from letting its nationalist convictions hurt Hungary’s fast-growing economy.

Lowering foreign currency-denominated debt is generally smart policy since it reduces a country’s exposure to exchange rate risks. Turkey’s recent economic troubles have revealed the danger of having a lot of dollar-denominated debt when the dollar is appreciating (and the lira plunging). And Turkey isn’t the only emerging economy that has become more dependent on foreign currency funding in the last decade: Malaysia, South Africa and Thailand have opened themselves up to the same kind of turbulence, as the European Central Bank showed in a December report focusing on emerging markets’ economic vulnerabilities. 

Some governments, especially those left by sovereignty-loving leaders, have, however, worked diligently to reduce their exposure: Along with Russia and Poland, Hungary has been successful at cutting the foreign currency-denominated share of its debt. It stood at about a third of the total public debt in 2010, when Orban came to power, and it’s down to 20 percent now. The reduction is part of Orban’s generally prudent fiscal policy: Keeping deficits low and reducing debt are his trademarks. It’s also especially logical for Hungary, which only recently had to contend with a crisis stemming from an accumulation of household debt denominated in foreign currencies, especially Swiss francs. 

But some of the nationalist governments, including Poland’s and Hungary’s, also have been intent on lowering the share of debt held by non-residents. The political logic behind this is clear: Being beholden to foreigners means more external dependence and thus less sovereignty. Ending up under the management of external creditors, as Greece did, is the stuff of nightmares for nationalist politicians. In Hungary, the share of debt held by non-residents has fallen to less than 40 percent from 60 percent in 2011.

The economic logic is murkier, though. Research shows that the more of a country’s debt non-residents hold, the lower the cost of borrowing. Sourcing funds abroad also tends to increase the effectiveness of government spending in boosting growth: It lets domestic players put more resources into consumption and investment rather than government debt. Finally, a country’s banks become more vulnerable when they load up on their country’s government debt. European banking regulators have been trying to fight this phenomenon in recent years.

The only reasonable economic argument against the foreign ownership of a country’s debt is that foreign investors tend to be skittish, dumping bonds at the first signs of trouble. On the other hand, though, given a commitment to a prudent fiscal policy, there’ll be no reason for foreigners to flee as they’ve done, for example, from Italian government debt, leading to a big and not particularly desirable increase in the share of debt held by residents. Countries that stress fiscal prudence, such as Germany and the Baltic states, do fine with a large share of their debt owned by non-residents.

No European country has kept its debt entirely out of the hands of foreigners or set a goal to do it – except Orban’s Hungary. So far, the post-2010 Hungarian governments have kept the country on a steady course of economic improvement, despite a worsening corruption climate and curbs on the rule of law. But both Hungarians and investors in the country’s dynamic economy, projected to grow 3.5 percent this year, should watch for signs of politically motivated policies that could damp the growth and end up wreaking havoc on the one area in which it’s been difficult to fault Orban.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

©2019 Bloomberg L.P.

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