Disinflation will slow substantially in 2024
Forecasting the rest of 2023 seems easy. CPI-inflation is safely set to fall well below 10% by December, and the MNB sterilization rate will be most likely reduced at similar speed, while remaining positive in real terms. With a substantially improving current account, this should be sufficient to keep the forint south of EURHUF 400, which in turn is also a precondition for continued rapid disinflation in Q4. A lot of fiscal adjustment is also set to take place, but only with moderate results as to the reduction of the deficit and the debt ratio. The reasons are the underperformance of growth and indirect taxes, heightened yields/interest rates, lower revenues from EU transfers, and the delayed settlement of the financial burden from last year’s sizable retail energy subsidies. By now, the prospect of slightly negative GDP growth for the whole year has become widely accepted, despite a likely return to positive growth in H2.
However, predicting 2024 seems difficult and highly contentious. The general expectation, including mainly the official view, is the return to materially positive growth, together with continued disinflation and a descending trend of the MNB sterilization rate. We agree with the first and the third points on this list, but we do not think that the currently foreseeable set of government policies would be conducive further disinflation. This is because the government intends to boost growth through generous wage arrangements and rising consumption next year, not least due to political considerations, in view of the two important elections scheduled for June.
As a result, and also because energy import prices are unlikely to fall from their current levels, only a small amount of further disinflation is likely in 2024, a great portion of which would still come from favorable base effects. This should still allow a limited amount of interest rate reduction, keeping the sterilization rate significantly positive. In addition, we expect further fiscal adjustment, but in a less energetic or even ruthless fashion than in 2023. Adjustment efforts will likely be still sufficient to keep the deficit and the debt ratio on a moderately descending path, given the growing economy and the sharply decreasing burden of energy subsidies.
The BOP will almost certainly improve substantially this year, but not quite as much as one would think on the basis of the often-cited impressive current account data. This is because all of EU transfers, net FDI flows and errors and omissions appear to be disappointing. In 2024, some deterioration is likely to come again, mainly as a result of the expected recovery of import demand.
The likely fate of access to EU development funds remains a tough call, but some improvement can be seen in the chances that close to half of cohesion policy fund quotas might be opened for Hungary within the next few months. Our forecast still does not include the revenue/inflows out of that source, and so a positive EU decision on that subject is to be taken into account as an upside risk to our macro scenario, though far from being a possible game changer.
Rating agencies are unlikely to be happy with the pace of fiscal adjustment, but it is not at all certain that this should lead to outright negative rating decisions, especially if the government manages to grab at least a part of the EU transfers allocated to Hungary. In the worst case, Hungary could be pushed down into the lowest investment-grade rating in the coming year or so.
Finally, the Fidesz government is still likely to face difficult times in its EU/NATO relationships, as usual, but its conflicts are much more likely to drag on in the usual chronic fashion than becoming acute in the foreseeable future. Indeed, all participants of the process are well aware of (geo)political and economic realities, and this is unlikely to change any time soon. Domestically, popular support for Fidesz will likely continue its current erosion, but the governing party is still likely to comfortably win the upcoming local government and European Parliament elections.
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