Boston, MA -- (SBWIRE) -- 01/13/2014 -- The expansion and modernisation of Hungary's military forces and hardware was hampered in 2013 by the centre-right Fidesz party government's firm commitment to reining in the budget deficit to below 3.0% of GDP in an effort to exit the EU's Excessive Deficit Procedure (EDP). With the administration of Prime Minister Viktor Orban staking a significant amount of political capital on staying out of the EDP and facing the prospect of a legislative election in the Spring of 2014, we forecast government defence expenditure to fall 4.0% y-o-y (in dollar terms) in 2014 to US$1.27bn, equating to 1.8% of total government expenditure.
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While Hungary's defence and security relations with NATO are set to remain strong in 2014, the government's relationship with the EU is set to continue as a source of contention for both sides. A number of constitutional amendments made during the course of 2013 have irked the EU, with Brussels accusing the Fidesz government of passing changes that threatens the independence of the judiciary and undermine the rule of law. A number of these amendments have been altered to allow Hungary to continue receiving EU development funds. However, the disagreement has sown potentially damaging seeds of distrust between the administration and European leaders, which have been nurtured domestically by bombastic rhetoric from the government regarding national sovereignty.
We believe this sort of rhetoric from Fidesz will continue up until the general election, and afterwards as our European Country Risk team expects Fidesz to emerge victorious given the popularity of Orban and the lack of enthusiasm for the main opposition Socialists (MSZP). The MSZP are set to contest the election alongside former Prime Minister Gordon Bajnai's Together 2014 alliance, with candidates from only one of the groups contesting each constituency as not to split the centre-left vote. Even in spite of this Fidesz's poll leads are so commanding (around 50% among decided voters) that we do not foresee a likely scenario where Orban will not remain in power following the election. The far-right nationalist Jobbik party are set to remain the third largest party in parliament, but they have seen some of its vote absorbed by Fidesz as the latter has moved further towards the right.
Another four years of Fidesz in power is likely to provide somewhat of a boost to the country's military forces, with the party historically more inclined to spend on defence than an MSZP administration. However, in attempts so far to rein in the fiscal deficit while shielding households from austerity measures the government has not shied away from raising taxes on corporations, notably those with foreign owners. As a result we do not rule out increase taxes on firms operating in the defence and security sector in Hungary during the course of 2014.
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