Tag Archives: Turkey

The Weekly Mishmash: December 14

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1.  EM: Who is vulnerable?
Markus Jäger, Deutsche Bank

The EM economies most hit by the current spike in global risk aversion are those that attracted the largest inflows of ‘fickle’ capital in recent years. In response to financial market volatility, most EM policymakers have opted to let their currencies depreciate rather than tap foreign reserves.

Poland and Turkey have low foreign reserve levels relative to other EMs as seen in the Deutsche Bank chart, but Jäger believes they are still sufficient to avert a crisis. In particular, he points to Poland’s flexible credit line with the IMF, which reduces the economy’s vulnerability to a drying-up of capital inflows.

EM Muser: I looked at this issue in a post back in October: Which Emerging Markets Appear Vulnerable? A Look at Early Warning Indicators. Turkey, and to a lesser extent Poland, also stood out as vulnerable based on my analysis. In addition to low levels of foreign reserves, both are running current account deficits. Turkey’s is particularly large and is estimated to reach a very high 10% of GDP for 2011.

I agree with Jäger that the flexible credit line will help insulate Poland from crisis. However, I think Turkey looks quite vulnerable, at least in the near-term. Its high external financing needs leave it very exposed to a sudden stop in capital inflows. Right now it’s largely a confidence game.

2.  Indonesia: Land Bill to Help Infrastructure and Enhance ‘Structural Goldilocks’
Deyi Tan and Seen Meng Chew, Morgan Stanley

Indonesia’s parliament passed a long-awaited bill that will move forward much needed infrastructure projects on December 14, according to Reuters. Prior to its passage, analysts at Morgan Stanley detailed why this would be a positive step forward. They believe the increase in infrastructure spending will help raise Indonesia’s potential growth to around 7.0-7.5% by 2015.

EM Muser: As I argued in a post last month, Indonesia is a relative bright spot in today’s global economy. (See: Indonesia: Ugly Duckling No More.) The country boasts a large domestic market, a growing population, low debt levels, relative political stability and smart policy making.

The passage of this land bill represents another reason to be bullish on Indonesia especially since analysts viewed weak infrastructure as one of the major structural constraints on growth. The bill is also likely to prompt sovereign ratings upgrades. (December 15 Update: Fitch raised Indonesia’s credit rating to investment grade following the bill’s passage. Moody’s and S&P continue to rate Indonesia below investment grade.)

3.  EMEA Weekly: Russian election special – how much can you cheat?
Danske Bank

Following December 4 parliamentary elections, roughly 50,000 people took to the streets in the biggest protests in over a decade. The ruling United Russia party narrowly won with 47% of the vote amid widespread fraud allegations. The boiling over of dissatisfaction with the government surprised analysts and overshadowed news of the expected approval of Russia’s WTO entry later this month.

Despite the outpouring of anger, Danske does not expect widespread protests in Russia like those seen in the Middle East and North Africa earlier this year. Moreover, Danske still expects Vladimir Putin to emerge victorious in the March presidential election as “he is the only viable option.”

EM Muser: The protests spurred Russian billionaire Mikhail Prokhorov to announce himself as a challenger to Putin in the coming presidential race. Skeptics believe Prokhorov’s candidacy is government-sanctioned in an effort to defuse growing tensions. In any case, the March presidential race just got more exciting and political uncertainty in Russia will remain elevated.

4.  How the role of equities may shrink
McKinsey Global Institute

A new McKinsey report points to the transformation of emerging-market households into a powerful new investor class. Their share of global financial wealth is expected to rise from 21% to as much as 36% of global financial wealth by the end of 2020.

EM investors behave differently than those in mature economies and are less likely to invest in equities, according to McKinsey. “This shift is being exacerbated by aging and other trends in the developed world that are dampening investor appetite for equities. As a result, equities could decline from 28% of global financial assets in 2010 to 22% in 2020.”

EM Muser: If McKinsey is right, then demand for equities in EM markets will not keep up with supply. This, in turn, will raise companies’ cost of equity. While this is bad news for growing companies in these markets, it could result in higher returns for EM equity investors. (Unfortunately, I was only able to access the summary. If anyone is able to send me the full report, I’d greatly appreciate it.)

The Weekly Mishmash: November 29

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1. A story of Brics without mortar
Philip Stephens, FT

Does it make sense to lump the BRICs together? Not really, says Stephens.

He points out that Brazil, Russia, India and China have little in common other than impressive rates of economic growth. They are not united politically, and he doesn’t see them reliably allying together. Rather, he sees a more multi-polar world where “rising states want to do some things together and some things with the west.”

EM Muser: I completely agree with Stephens that it’s a mistake to view the BRICs as a united political bloc. As the economic power of many emerging markets grows, their political clout will grow as well. However, it should not automatically be assumed they will work together.

We’ve seen a number of recent examples that highlight the lack of coordination among the BRICs. This spring, many EMs would have loved to place one of their own at the helm of the IMF, but they disagreed on who. Overall, it looks like we’re headed toward a more multi-polar geopolitical arrangement – characterized by shifting alliances and no clear dominant power – which likely means a less stable world.

2. South African lawmakers approve ‘secrecy bill’ to protect state
David Smith, Guardian

South Africa’s lower house of parliament passed a controversial ‘Protection of Information’ bill on November 22. The media – as well as human rights organisations, unions and renowned national heroes like Desmond Tutu and Nelson Mandela – see the bill as a major setback for freedom of expression and the fight against corruption.

Daniel Bekele, Africa director of Human Rights Watch: “The manner in which the government pushed this bill through parliament instead of proceeding with consultations as promised, as well as the secrecy embedded in this legislation, send very worrying signs about the government’s commitment to transparency.”

EM Muser: This so-called ‘secrecy’ bill is yet another sign that political risk in South Africa is on the upswing, which is negative for the investment climate. In late October, President Zuma sacked two cabinet ministers for misuse of public funds. Corruption is an ongoing problem, and this bill will make it harder to stamp it out.

The ANC continues to dominate South African politics, winning 66% of the vote in 2009. However, what was once a dynamic party is looking increasingly sclerotic, between allegations of corruption to growing dissension within the party ranks (see The Weekly Mishmash: November 13). Just because the governing party has a large majority in no way ensures a predictable policy environment. Look at Hungary.

3. Not amused: China’s theme park industry should be making easy money
China Economic Review

Over-investment in China is not limited to ghost towns and highways to nowhere. Apparently it also extends to theme parks. Many are boondoggles, and regulators are cracking down. “[T]heme parks larger than 20 hectares or requiring more than US$78 million in investment must obtain national-level approval or halt construction immediately.”

EM Muser: There has been lots of talk about fizzy conditions in China as well as corruption among government officials. The theme park bubble is just the latest example. 

4. Fitch Revises Turkey’s Outlook to Stable; Affirms at ‘BB+’
Fitch Ratings

Fitch held Turkey at one notch below investment grade, but cut the ratings outlook to stable from positive last week. This contrasts with S&P, which upgraded the country’s local currency rating to investment grade in September.

Despite strong government finances and a healthy banking sector, “Turkey’s large external financing requirement leaves it vulnerable to the deterioration in the global outlook,” according to Fitch.

EM Muser: While I am upbeat about Turkey’s medium-to-long term economic prospects, I agree with Fitch that the economy looks vulnerable in the short-term.

As I noted in a recent post, Turkey’s high current account deficit (which Fitch expects to reach almost 10% of GDP in 2011) combined with limited foreign reserves and high amounts of short-term external debt leaves the economy very exposed to a dry-up in external financing. (See Which Emerging Markets Appear Vulnerable? A Look at Early Warning Indicators)

The Weekly Mishmash: November 2

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1. Regional Economic Prospects: October 2011

European Bank for Reconstruction and Development (EBRD)

Economic fundamentals in emerging Europe are generally better than before the onset of the crisis and the EBRD does not expect another region-wide recession. But it also believes the region now faces greater downside risks.

“[E]xternal shocks may be more severe than in 2008/09 on account of higher stress in the euro zone, including the banking systems, particularly under the downside scenario. There is a risk that the ability of bank groups to pass on support to their subsidiaries in the transition region may be constrained by their national governments. This could result in a substantial reversal of bank debt flows and a large contraction of credit in the region, with potentially severe consequences for output.”

EM Muser: Similar to my recent post (Is the CEE Better Prepared This Time Around?), the EBRD questions whether CEE countries will prove more resilient this time around and hones in on the potential for a severe disruption in cross-border banking flows.

The EBRD advises increased policy coordination along the lines of the Vienna Initiative in 2009, when Western European parent banks collectively pledged to maintain their exposure to the region’s hardest hit countries. The Vienna Initiative was a novel idea that pulled the region back from the brink of a full-fledged crisis. However, such an initiative could prove more difficult to implement this time around given the heightened stress on Western European banks stemming from the eurozone debt crisis.

2. The Past, the People and the Policies

Spyros Andreopoulos, Morgan Stanley

The author examines the forces that have shaped the thinking of today’s central bankers. He notes that the most prominent – Ben Bernanke (US), Adam Posen (UK), Athanasios Orphanides (ECB) – have spent a large amount of time studying ‘depression economics’ – eg. the Great Depression and Japan’s more recent slump. As a result, they believe in avoiding deflation at all costs and in avoiding premature tightening that could tip the economy back into recession.

Andreopoulos notes that this line of thinking comes with certain risks: “In particular, erring on the side of caution likely implies exiting too late, which in turn means elevated medium-term inflation risks. Yet, it is rational for a risk-averse central bank to prefer the lesser of two evils…”

EM Muser: Andreopoulos focuses on advanced economies, but his points are also useful in understanding recent actions of emerging market central banks. Like advanced economies, they face a delicate balancing act.

As the global backdrop darkens, EM central bankers understandably want to cushion the blow on their economies. And since monetary policy works with a lag, several (eg. Brazil, Indonesia, Israel and Turkey) decided to preemptively cut their policy rates, surprising many analysts. (See my post: Giving Turkey’s Central Bank the Benefit of the Doubt). Notably, Turkey has since backtracked and raised its lending rate on Oct 20 due to a sharp depreciation in the lira.

As with advanced economies, cutting rates is a gamble as it raises inflation risks down the line, especially for EM central banks that have fought hard to gain credibility. However, for many, this is the lesser of two evils given the threat of a new global recession.

3. China labour costs soar as wages rise 22%

Simon Rabinovitch, FT

Official data showed minimum wages in the world’s most populous country rose by an average of 22% this year. Labour costs are starting to rival those in other emerging markets, and Vietnam and Bangladesh are among the beneficiaries that are luring low-cost manufacturers and winning market share.

EM Muser: The jump in minimum wages relates to government efforts to calm social tensions and stimulate domestic consumption. However, the rise may backfire as the Economist magazine reports that some businesses, short of cash, are simply not paying their workers. (See: Unpaid wages in China: Can’t pay, won’t pay).

China will continue to offer relatively cheap labour for now, but questions are growing about how long it will last given the country’s demographics. According to UN data, China will add roughly 18 million people to its working-age population in 2011-20, which is paltry compared to the 114 million people added over the past decade.

4. Brics split on euro zone rescue

Carolyn Cohn, Reuters

Emerging markets aren’t going to be the white knights for the eurozone that many had hoped. India and Russia, in particular, are wary of investing in the European Financial Stability Facility (EFSF), although they may still extend financial support through the IMF.

EM Muser: This should not come as a surprise. First, it would be very hard for BRIC leaders to sell their populations on the need for a European bailout when their per-capita incomes are so far below the euro area average.

Second, the big emerging markets have not coordinated well on the international stage, which makes it unlikely the BRICs could successfully reach a joint agreement on a bailout plan. For example, Brazil’s finance minister Guido Mantega let slip in September that a BRIC rescue of the eurozone was a possibility. However, he had failed to consult with the other BRICs before his pronouncement.

The BRICs could exert more influence if they presented a more united front. For example, this spring, many EMs would have loved to place one of their own as head of the IMF. However, they disagreed on who. Europe and the US were better coordinated and managed to stick Christine Lagarde in the top spot. (See my related post: Why Emerging Markets Are Not in the Running for Top IMF Job)

Which Emerging Markets Appear Vulnerable? A Look at Early Warning Indicators

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All eyes are now on the eurozone debt crisis. However, we know from past experience that problems in advanced economies can spill over to the rest of the world with dangerous consequences. Emerging markets are not immune. The IMF Director Paulo Nogueira Batista Jr recently expressed concern that capital could flee Brazil if the eurozone debt crisis intensifies, and his concern is not unfounded.

As seen in 2008-09, global risk appetite dried up and prompted large capital outflows out of many emerging markets, particularly in Eastern Europe. As a result, certain economies found themselves teetering on the edge of crisis. Latvia, Hungary and Romania were among those who turned to the IMF for help.

These Eastern European economies showed vulnerabilities before the onset of the global financial crisis, as exhibited by high current account deficits and heavy external debt service obligations. However, it took an external shock to bring these vulnerabilities into the spotlight.

So which EM economies look vulnerable in the event of another sudden stop in capital flows?

Below I look at a cross-section of emerging markets and compare their relative vulnerability to a sharp slowdown in capital inflows. (Note: the set of EMs was chosen largely based on data availability).

There is no defined set of early warning indicators that perfectly predicts which countries are at risk of a crisis, but some have stronger predictive power than others. Jeffrey Frankel and George Saravelos conducted a sweeping literature review to find the most consistent leading indicators of crisis. (See: Reserves and other early warning indicators work in crisis after all)

Measures of international reserves and the real exchange rate stand out as the best tools to assess a country’s vulnerability. Their findings suggest the current account balance is also a good indicator to monitor.

Figure 1: Adequacy of international reserves

Source: IMF, national central banks, author’s calculations

*Stock of external debt as of June 2011, **GDP based on IMF’s latest 2011 forecast

International reserves provide a certain degree of insurance against capital flow volatility. Among the EMs surveyed, Russia and India stand out for their relatively large caches of international reserves, while Turkey ranks near the bottom of the pack, both as a % of external debt and % of GDP, which is a source of vulnerability. Blogger Emre Deliveli, as well as journalist Taylan Bilgic, questioned the adequacy of Turkey’s reserves in a recent column.

The ratio of short-term debt to reserves is a particularly good measure for assessing vulnerability. The lower the ratio, the better. Unfortunately, not all countries provide data on short-term debt, but a few do. For example, India’s ratio is 21%, well below Turkey’s ratio of roughly 86%.

This measure, like the others, needs to be taken with a grain of salt. A country may have a large chunk of debt coming due within the next year, but may have very strong macro fundamentals, making repayment problems highly unlikely. So it’s always necessary to consider the context. In any case, Turkey also looks vulnerable on this measure.

Figure 2: Divergence of Real Effective Exchange Rate from Trend

Source: BIS, author’s calculations

The probability of a currency crisis increases when the real exchange rate is overvalued relative to trend. However, this needs to be taken with a grain of salt as well. For example, many Asian currencies showed no significant appreciation in the late 1990s, yet these economies still descended into crisis.

On this measure, the Brazilian real and Indonesian rupiah currently show the most overvaluation relative to trend. In contrast, Turkey looks to be the least vulnerable on this measure.

Figure 3: Current account balance

Source: IMF WEO Database, September 2011

Large current account deficits also increase the probability of crisis and indicate that a country is borrowing more than it’s saving. All recent financial crises (eg. the Asian Crisis, Argentina in 2000, Brazil in 2002) featured current account deficits, with the exception of Russia in 1997. A current account deficit is not necessarily a bad thing if it is financing activities that are enhancing the country’s productive capacity. However, a deficit can quickly become unsustainable if a country is unable to secure the necessary external financing to fund it.

On this measure, Turkey – and to a lesser degree, Poland – look potentially vulnerable.

Conclusion

A look at early warning indicators suggests that Turkey is vulnerable to a sudden stop in capital flows based on its relatively low level of reserves and high current account deficit. Poland also looks vulnerable – albeit less so than Turkey. However, as I note above, these measures need to be taken with a hefty grain of salt. They’re useful in figuring out where a countries’ vulnerabilities may lie, but further investigation is necessary to understand the context.

Giving Turkey’s Central Bank the Benefit of the Doubt

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Analysts bashed Turkey’s central bank following a surprise cut on August 4 that brought the policy rate to 5.75% from 6.25%. The move formed part of a broader policy mix that, on balance, resulted in monetary easing.

The main bone of contention is that many analysts believe Turkey’s economy is overheating, making a rate cut seem reckless.  However, a variety of data suggest overheating concerns are misplaced and point to a sharp global downturn as the bigger worry, as I will detail below.

While the central bank (CBRT) could certainly improve its signaling of policies, I am willing to give the CBT the benefit of the doubt for now. The real test will be whether the CBT proves as proactive at raising the policy rate when conditions require it.

Criticism of the CBT

The quote below from Tim Ash of RBS, as published by the FT, is representative of many in the overheating camp:

“The danger with this totally out of the box move is that investors will seriously begin to question the credibility of the CBRT as an institution, given that foreign investors prime concern at present on Turkey are fears of overheating as reflected in the CAD.”

Also, see this comment from Danske Bank:

“Turkish GDP growth is still in double-digit territory and the current account has clearly grown to an unsustainable level. Any normal inflation targeting central bank with this kind of data would tighten and not loosen monetary policy.”

Rejoinder to Overheating Claims

The domestic economy is showing signs of moderating, rather than overheating. Yes, GDP has grown strongly, but this has to be seen as part of a natural bounceback in the wake of a sharp downturn. This rapid pace of growth is not expected to continue.

Below I highlight some data that suggest Turkey’s economy is not overheating.

Figure 1: The capacity utilisation rate sits below pre-crisis levels and dipped in July

Source: CBT

Figure 2: The annual rate of growth of industrial production has fallen steadily for the past five months

Source: CBT

Figure 3: The real sector confidence index – an indicator of business conditions and an important leading indicator of growth – dipped in July to its lowest level since 2009

Source: CBT

Figure 4: Inflation is above the year-end target of 5.5%, but not far above, and it’s quite low in a historical context

Source: CBT

Sidenote: Many in the overheating camp point to a high current account deficit, approaching 10% of GDP in 2011, to support their claims. The current account deficit is certainly high and this is quite worrisome. However, the deficit is largely structural (owing to Turkey’s heavy dependence on energy imports as well as a chronically low savings rate). This means that it’s not a short-term problem and neither the central bank nor government can simply wave a magic wand and fix it. I will tackle this issue in a later blog post.

Worrying Signs in Advanced Economies

While the domestic economy is showing signs of moderating, the data above do not by any stretch of the imagination justify a rate cut. So it’s necessary to look at the worsening outlook in the US and eurozone, which I detail below, to understand why the CBT opted to slice the policy rate. As the global financial crisis showed, Turkey’s economy is quite vulnerable to developments in the advanced world.

US

  • The Fed Open Market Committee recently highlighted the downbeat state of the US economy in its August statement and said economic growth in 2011 is slower-than expected.
  • In July, the US government released its latest set of growth figures – including revisions going all the way back to 2003 that show the recession was worse than expected. The contraction in real terms, from peak to trough, was 5.1% – one percentage point worse than thought. See related article from BBC.
  • In his August 26 speech at the Jackson Hole conference, Bernanke noted that output in the US has still not returned to pre-crisis levels and that unemployment continues to hover at rates of over 9%. He also said that the Fed has revised down its US growth outlook. At the same time, he made no commitment to any new quantitative easing measures.

Eurozone

  • There is no resolution to the eurozone crisis on the horizon given ongoing political wrangling, and problems seem to be intensifying with Italy moving into the spotlight. The ECB’s bond buying is only a stopgap measure, as Marc Chandler notes in his recent post: Why I Am Going to Worry About Italy on My Summer Vacation.

Other Factors

In an April presentation, the CBT notes its desire to keep interest rate differentials as low as possible in order to prevent large inflows of speculative capital into Turkey. The concern is that such flows can rapidly reverse in the event of an external shock or shift in investor sentiment. The CBT’s decision to cut the policy rate supports this objective as it narrows the interest rate differential vis-à-vis advanced economies.

Note of Caution: Political Pressure May be a Factor

Yavuz Canevi, who helmed the CBT in the mid-1980s, gives voice to worrisome rumblings that pressure from the government may have helped motivate the surprise rate cut.

According to Bloomberg, Canevi said: “I really would not say that the central bank had pressure, but psychologically you can call it pressure. The current governor is much closer to Deputy Prime Minister Ali Babacan than the previous governor. They were childhood friends” and Basci is trying “to accommodate the policies of the current government.”

I believe the real test will be whether the central bank proves as proactive at raising rates when conditions change and this is something to carefully track.

Bottom Line

A range of indicators show domestic economic activity is moderating. Turkey has a wide current account deficit, but that’s largely a structural problem (a very big problem!) and there are no quick fixes. Meanwhile, the global economy looks headed for increasingly choppy waters.

In light of these events, the central bank’s decision to cut the policy rate does not look so absurd and could even be hailed as ahead of the curve. While part of the CBT’s motivation to cut rates may be due to indirect political pressure, I am willing to give it the benefit of the doubt for now.

Hungary and Turkey: Political Parallels?

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Hungary and Turkey both have popularly-elected leaders with authoritarian bents and strong majority governments. They show that threats to democracy are not necessarily overt, like a military coup, and can instead be subtle, involving a gradual erosion of checks and balances. These governments have infringed on media freedom and attempted to concentrate power. Nevertheless, the results from the June 12 election in Turkey are heartening and suggest the ruling party there will not enjoy unchecked power.

The ruling AK Party won Turkey’s June 12 elections, but not by a complete landslide, as seen in the graph below. The AKP does not have enough seats to ram through a new constitution on its own and will need to compromise with the opposition. In contrast, Hungary’s Fidesz government won an unprecedented two-thirds majority in April 2010 elections and has since pushed through a controversial new constitution, which has contributed to political polarisation in the country and cemented the party’s grip on power.

Distribution of Parliamentary Seats

Attacks on Press Freedom

The media, known as the ‘fourth pillar of democracy,’ can serve as an important government watchdog. However, the Fidesz- and AKP-led governments in Hungary and Turkey, respectively, have moved to limit press freedom.

In Hungary, the Fidesz-controlled parliament passed a controversial media law in December 2010 that allowed the government to impose large fines on publications considered unbalanced. Other EU member states heavily criticised the law, with Germany calling it a ‘danger to democracy.’ The government partially amended the law in early 2011, but did not revoke it. Until recently, Hungary had scored comparatively well on press freedom.

Turkey is touted as a model of democracy for Arab states to follow, but consistent infringements on press freedom suggest that Turkey’s democracy is not as healthy as it could be. A Times magazine article, from March 2011, notes the arbitrary arrests of journalists who have criticised the government and its clampdown on access to thousands of websites. About 58 of the country’s journalists have been imprisoned, according to the Turkish Journalists Association.

Populist Tendencies

Hungary’s Fidesz government has sought to pin the blame for the country’s economic problems on others. So far, the government has avoided implementing the tough structural reforms needed for longer-term fiscal sustainability in an effort to avoid alienating its domestic support base. The government had a high-profile falling out with the IMF in July 2010 as it sought to avoid implementing unpopular austerity measures. Then, later in 2010, the government imposed sector-specific taxes affecting mainly foreign-owned businesses. The government has recently announced a series of structural reforms, but there is a big question mark over whether they will actually be implemented. (See my earlier post – Fitch Raises Hungary’s Ratings Outlook: Odd Timing)

Turkey’s fiscal situation is not as problematic as Hungary’s, but it too has avoided any enforced fiscal belt-tightening. The AKP government flirted with an IMF deal during the global financial crisis, eventually deciding it didn’t need one, which in retrospect seems like a good decision. To shore up market confidence, the government then proposed a fiscal rule, only to eventually drop the idea as economic growth returned. The government has shown itself to be adept at retaining market sentiment. (See Turkey’s aborted fiscal rule by Turkish columnist Asim Erdilek.) And like Fidesz, IMF-bashing remains popular with the AKP government (See The Kapali Carsi by Emre Deliveli), even though neither Hungary, nor Turkey, currently have an active IMF programme.

One-Party Majoritarian Rule with Differences

Turkey’s AKP did not achieve a large enough majority in June 12 elections to unilaterally impose a new constitution, which is a good thing based on Hungary’s experience. In April 2011, Fidesz pushed through a controversial new charter, which contains provisions that amount to a power grab. For example, the constitution enshrines changes to the judiciary that undermine its independence.

• Hungary’s Constitutional Court will be expanded from 11 to 15 members, allowing the current, Fidesz-controlled parliament to name new members.

• The Constitutional Court will be barred from ruling on fiscal matters until public debt falls below 50% of GDP. As public debt exceeded 80% of GDP at end-2010, this implies that the court will not be able to rule on fiscal matters for the foreseeable future.

• Hungary’s constitution leaves many areas (electoral rules, party financing, the municipal system, the tax and pension regime) to be governed by supplementary laws, which future governments will find difficult to change. These laws require a two-thirds majority, and Fidesz plans to pass legislation related to these areas before end-2011. Future governments will find it challenging to piece together such a super-majority.

Why Should Investors Care?

Majority governments are often hailed for bringing political stability, which is a positive for the investment environment. But as the case of Hungary has shown, a super-majority government can also create a more uncertain business environment, leading to changes in the rules of the game without consultation or notice, as occurred with Hungary’s imposition of ‘crisis taxes’ on the foreign-dominated banking, energy, retail and telecom sectors.