Accelerating the Covid vaccinations has become critically urgent
The development of the Covid new infections curve has changed for the worse lately. Following the spectacular reversal of a second wave, the situation stopped improving in late January and the daily number of new infections has been increasing again ever since. The authorities have announced the beginning of a third wave of the epidemic, which they are blaming on the spreading of the so-called "British variant" of the virus. However, the situation is probably more complicated than that.
The government is rejecting any further tightening of Covid lockdown rules, stressing that the solution to the problem must be to push the pedal as hard as possible concerning mass vaccination. The latter is also crucial as activity in tourism, agriculture and construction normally starts to speed up around springtime, and as impatience with the lockdown regime is growing among the domestic population.
However, Covid vaccination is not going rapidly enough to allow an early reopening. According to the official explanation, this is due to the low availability of vaccines, and there is evidence underlying that claim as regards the early phase of the vaccination process. Nonetheless, incoming vaccine shipments appear to be accelerating, on which basis the government is vaguely promising a cautious and gradual reopening to start at some point in Q2. But the inherent risk, including the feasibility of further large vaccine imports and public services’ ability to vaccinate much faster than currently, is quite high.
Preliminary GDP for Q4 2020 came out much better than government and market expectation, meaning a small increase for the quarter but still a marked setback on yoy basis. The fact that reopening will not take place before end-March still confirms that yoy growth will be most likely moderately negative in Q1, before it would turn materially positive on the well-known Covid base effect in Q2. The rest of the year remains largely uncertain, depending mainly on the success of Covid vaccination.
Official speakers keep proudly referring to the fact that employment fell only by a marginal amount in the year to December 2020. That is correct, but a very large number of employees were transferred to part-time status, and even among full-time workers, further big crowds were paid substantially less or paid partially out of the government budget. On a per employee basis, the average of full-time wages rose considerably last year, partly as a result of official wage subsidies and markedly increasing payments in the healthcare sector.
Monetary data for December has confirmed the conclusion that the fiscal deficit was artificially pumped up in the last few weeks of 2021, as very large amounts of newly generated cash reserves appeared in nonfinancial enterprises and in the non-profit sector. In January, the central government had a considerable cash surplus, which was not unusual on the basis of normal seasonality. In that month, a substantial amount of funds was centralized from various parts of the approved budget, by cancelling allocations and freeing up funds for the government cabinet’s own discretion.
The current fiscal policy buzzword appears to be “restarting the economy”, and the main supportive measures, according to the government’s own account, are a lowering of the VAT back to 5% on newly built apartments, a big pay raise for doctors, a half-loan and half-subsidy support for the renovation of apartments, wage subsidies, an extra one-week payment to old-age pensioners, full exemption from the income tax for those under 25 years and a recently announced interest-free loan to SMEs. The Finance Ministry keeps stressing this year’s revised deficit target of 6.5% of GDP, implying that the funding requirements of the foregoing measures have been taken into account already, or they are going to be secured through "regrouping" maneuvers carried out within the approved budget.
Now that GDP growth looks better, the BOP is largely satisfactory and domestic credit generation has been made independent from the main central bank interest rates, MNB policy can focus more on inflation than earlier. This looks quite timely as in January, core inflation rose above the Bank’s tolerance ceiling, even though headline CPI-inflation remained below target on favorable food prices. Inflation is boosted by more expensive fuel and by the carry-over impact of last year’s forint depreciation. Given this picture, we expect the continuation of the MNB’s most recent relative policy tightness, with no interest rate cuts and a continued preference for a stable EURHUF rate over the next few months.
In terms of the MNB’s quantitative policies, the Bank is seen buying more government bonds directly and extending less of its long-term collateralized loans to banks. This shift seems quite logical under current circumstances, as the banking sector appears to be rich in liquidity, especially after the major loosening of fiscal policy at the end of last year.
In the area of EU relations, everything remains relatively quiet for now. Eyebrows remain raised high in Brussels, as they are actively looking into Hungary’s regulation and institutional practices regarding the distribution of EU funds. Just recently, the government has come forward with an amendment of legislation on public procurement, which goes in the direction of what the EU Commission would like to see. We would remain cautious in this regard, as legislation is one thing, and implementation is a different one. But it looks as if the rule-of-law issue has been pushed down to the technical level, creating an opportunity for Hungary to gain time on the implementation of the EU’s new fiscal penalty mechanism. In the meantime, distributions and reimbursements continue to run as usual.
Domestic politics is getting increasingly difficult for Fidesz, even though the apparent situation is that they can achieve whatever changes they want to make. For example, they have just taken away the license of Hungary’s last opposition radio channel, and in January they successfully got through with the quasi-privatization of a number of domestic universities. But opinion polls suggest that the opposition is increasingly popular, probably due to the government’s inability to put an early end to the Covid epidemic. Should Fidesz prove unable to sort out that problem quickly, this issue and the united opposition’s newly found cooperative spirit may cause a serious problem for them in next year’s election.
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