COVERING THE WATERFRONT: NATIONAL BANK CHAIRMAN ON

C O N F I D E N T I A L BUDAPEST 000632

SIPDIS

SIPDIS

DEPARTMENT PLEASE PASS TO NSC FOR ADAM STERLING

E.O. 12958: DECL: 04/25/2012
TAGS: ECON EFIN ETRD PGOV HU
SUBJECT: COVERING THE WATERFRONT: NATIONAL BANK CHAIRMAN ON
DOMESTIC REFORMS AND REGIONAL COMPETITIVENESS

REF: BUDAPEST 532 AND PREVIOUS

Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)


1. (C) Summary: Hungarian Central Bank (MNB) Chairman Andras
Simor shared his views on Hungary's economic trends and their
political impact with G-8 Ambassadors April 17. He expressed
particular concern re Hungary's lagging growth rate, the
continuing challenge of reforming attitudes as well as
regulations, and the temptation of renewed spending as the
elections of 2009-10 approach. End Summary.


2. (C) Opening with a reference to recent statistics
reflecting dramatic increases in per capita GNP in Slovakia,
Simor commented that the public should react to the news that
their "little brother" is surpassing them economically but
questioned whether Hungarians "really get it."


3. (C) Simor noted encouraging progress in reducing
Hungary's deficit, but believes the good news has been
"poorly communicated to the public." He also credited the
government with making "structural and sustainable cuts"
rather than taking limited steps with short-term impact.


4. (C) But, he continued, the government still faces
numerous challenges including:

Health Care Reform: Although he believes many of the changes
are already in train, he emphasized that the sector had
always been driven by the government and not by the market.
He believes hospitals still see few incentives in reforming
their operations, and sees "changing the concept" remains the
most difficult problem, and he believes the government "can't
do this alone." Nor, he continued, is there "an ideal model"
to which to turn. Although a multi-player system will help
in his opinion, he believes the governing MSZP party is
"divided at best" on the issue and cautioned that political
will could "evaporate," leading to skyrocketing health care
costs in the future.

Education: Simor was more optimistic about the impetus to
reform in the educational sector, and believes that schools
are becoming more cost-conscious as the focus shifts from the
quantity of students to the quality of the education.

Pensions: Simor stated that the government "should go
further" by extending the retirement age, changing the
retirement index to one based solely on inflation, and
abolishing the "13th month" payments. He cautioned that the
number of pensioners is "growing too quickly already," but
commented that the MSZP will be hesitant to take steps given
their strong support from retirees.

Administrative Costs: Simor described the government's
approach as "bold promises ... and no results." He advocated
the introduction of steps including incentive pay,
performance reviews, and efficiency benchmarks as ways to
start the slow process of "reforming our culture."

He added that the MNB should not be exempt from this process,
signalling his intention to look for ways to down-size staff
while maintaining the Bank's level professional expertise.
Simor also favors steps to reduce Hungary's Monetary Council
from 13 to 5-7. He believes this can be done through a
process of attrition ending in 2011, and would also like to
change the Council's composition by adding more "internal
experts" to roughly balance the number of "outside
representatives."

Taxation: Hungary, Simor remarked, cannot afford to reduce
its tax revenues but must shift its tax burden. He believes
the government should move forward on a real estate tax and
on increases to the VAT, but predicts "even more problems"
with pensions than on health care.

Inflation: Simor believes that the inflation rate will
stabilize at 5% by the end of the year and that a longer-term
rate of 3% is possible, although deregulation and wage
settlements pose "a real danger."

Political Temptation: Simor concluded by underscoring the
risk that the European Parliament elections of 2009 and the
national elections of 2010 will undermine fiscal discipline
in the long-term. He suggested tighter limits on medium-term
spending as a means to limit the excesses of
politically-motivated spending.


5. (C) Comment: Simor is off to a strong start at the Bank.
His remarks reflect a much broader view of the economy than
his predecessor's, and his personal stature may allow him to

use his new position to promote the reform process. We note
that his comments regarding the obstacles to Hungary's
competitiveness track closely with those of our contacts in
the business community, who have expressed their concern
regarding the prospect of a "double dip" should Hungary
experience another year of minimal economic growth. End
Comment.
FOLEY