(Bloomberg) -- Investors would prefer that Hungarian Prime Minister Viktor Orban win a small majority in Sunday's elections to build on his economic policies but fall short of a landslide victory that could let him double down on his illiberal political agenda.
The preference for stability means the market reaction to a victory by Orban's Fidesz party may be muted. Orban winning a simple majority, the most likely outcome, would allow him to preserve fiscal prudence and gains in economic growth and to continue funding politically-connected oligarchs.
A scenario that would see the premier regain a supermajority in parliament would be viewed more skeptically as it would give him a blank check to continue a crackdown on democratic institutions. On the other hand, a collection of opposition parties overcoming their bickering to hand Orban a shock defeat would also cause market turmoil, at least over the short term, interviews with fund managers and analysts showed.
Here are comments on how markets are most likely to react to possible outcomes:
BASE CASE SCENARIO: SIMPLE MAJORITY
Viktor Zsiday, portfolio manager, Hold Alapkezelo, who helps oversee 70 billion forint ($275 million) in assets:
This is the most likely scenario and it would mean more of the same: politically-connected entrepreneurs will continue to extend their influence over the economy as the country continues to trudge along toward some sort of state-capitalistic model. Meanwhile, EU funding is flowing in, there's a serious uptick in domestic consumption, corporate investments are rising. So the economy will be okay in the next two to three years.
Viktor Szabo, helps manage over $14 billion in funds at Aberdeen Asset Management:
This is the baseline scenario, which is similar to the supermajority as Fidesz would still be able to push though whatever it wants. The current economic model has been working well in the sense that it has helped the government achieve its own economic priorities and set up a new business elite. Fidesz doesn't need a 2/3 majority to carry out what may still be missing, such as the nationalization of a couple of more sectors.
Tilmann Kolb, UBS Wealth Management analyst:
In our base case scenario, the election would be a relative non-event for the Hungarian economy. We would not expect a major change in economic policy. Hungary has shown fiscal orthodoxy and a prudent approach with limited fiscal deficits. Growth numbers over the past years have reflected a smoothly running economy and we expect the government to keep the budget deficit in check and to try and further reduce external vulnerabilities. The government's focus for now seems to be on other areas, such as migration. A Fidesz win would likely be at most marginally positive for Hungarian asset prices.
Magdalena Polan, emerging-markets economist at Legal & General:
In general, markets prefer continuity. However, the policies of the current government have proven controversial and that was and still is visible in asset prices. The yield curve, for example, remains steep, despite the efforts of the central bank. Foreign direct investment in Hungary also suffered. If the government maintains its simple majority, it will likely continue with the current policies and the market reaction will likely be muted.
FIDESZ SUPERMAJORITY
Hold Alapkezelo's Zsiday:
That is the most dangerous scenario, as another supermajority may push Orban to crack down on what remains of democratic institutions. This may well trigger responses that could hurt Hungary economically.
- Legal & General's Polan:
If Fidesz regains a supermajority we would probably see a negative market reaction, a weaker forint and a further move up in long-term bond yields. This scenario could raise new concerns about the direction of monetary policy, the relationship with banks, or, in general, the unpredictability of the legal environment that characterized the previous period of supermajority.
OPPOSITION MAJORITY
- Hold Alapkezelo's Zsiday:
This is the least likely scenario and it would mean an upheaval, but more politically than economically. It would mostly mean that the opposition could remove Orban's allies from the helm of formerly independent institutions and set up a crusading anti-corruption office in the mold of Romania.
- Aberdeen's Szabo:
A surprise defeat would pose significant uncertainties in the short run, as we cannot be sure that the opposition parties can build a stable coalition. The risk of snap elections would also be higher. In this case, issues such as the fight against corruption, restoring the independence of institutions and the removal of officials such as the chief prosecutor, would overrule economic priorities. There's no immediate need in sight to change economic policy after the elections. In the longer run, a less centralized and corrupt cabinet would improve growth and sustainability.
- UBS's Kolb:
It is extremely difficult to assess what an opposition win would mean for the economy as their most unifying force is opposition against Fidesz rather than a common program. An unexpected win would lead to uncertainty around the formation of a government, its key players and policies, which may weigh on investor sentiment toward Hungarian assets.
- Legal & General's Magdalena Polan:
A victory by the opposition parties would mean large uncertainty over policy direction and the ability of a coalition of parties to hold together, even though markets would probably see this as lower risk of more populist policies or a rocky relationship with the EU. The uncertainty over the policies of the new government would likely cause some selloff in the forint and bonds as the central bank could be seen as less involved in the bond market.
--With assistance from Zoltan Simon
To contact the reporter on this story: Gabriella Lovas in Budapest at glovas2@bloomberg.net.
To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Andras Gergely, Michael Winfrey
©2018 Bloomberg L.P.
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