It will be difficult to stop Fidesz in April
In January, Fidesz continued its strengthening trend in opinion polls, returning after three and a half years to the high level of support it enjoyed around the latest local government election in October 2014. Fidesz is quite clearly set now to win a comfortable constitutional majority at the April election. Although there still seem to be ways for the opposition to reinforce their cooperation at the vote and reduce Fidesz’ win to a simple majority, this would be (a) most probably the maximum they could achieve; and (b) even that is rather unlikely to succeed.
Currently, Fidesz’ vote-getting efforts appear to be a mixture of various fiscal measures, the continuation of its conspiracy theory theme centered on George Soros, and personalized discrediting attempts aiming at political adversaries. The now predominant public and allied private media appears efficient in getting through with the second and the third items on the list. And although the soap opera in which Mr. Soros is named as a universal scapegoat appears somewhat simplistic, it may work well among the less educated part of the society, those who do not get much from campaign measures but are resonant to nationalistic narratives.
In exchange, the opposition has relatively little to offer, in addition to drawing attention to inconsistencies in the government’s migration policies, and bringing to light stories on official corruption. The first of these appears quite hopeless, and the second one also goes somewhat inefficiently. The latter is because the opposition faces difficulties in breaking through Fidesz’ media wall, and also because the local population’s expectations regarding the lack of corruption are rather low historically. Even the current top story in that regard, one that offers an alleged link between corruption and the prime minister’s family, appears to carry relatively little effective weight in short term.
In European diplomacy, the EU Commission has come forward with two proposals leading to a lower Hungarian share out of the 2021-2027 EU budget. The Commission’s full budget proposal is expected in early May. Meanwhile, Austrian chancellor Mr. Kurz said his country is interested in a smaller EU budget, and he will work towards that objective when his country holds EU presidency in H2 2018. Another important issue will be the composition of the new German government. The fact that Martin Schulz, a key political adversary to Mr. Orbán, is now unlikely to become foreign minister is markedly positive for Hungary’s government. Besides, Mr. Orbán’s best friend in German politics is taking over the ministry of home affairs, which is likely to help the dialogue in cases of disagreement over migration policies. On other matters, negative publicity for Mr. Orbán and Fidesz continued in recent weeks, with a sharply hostile language used against them by Mr. Soros at Davos and by a simultaneous FT article.
GDP growth accelerated to 4.8% yoy, sda in Q4 2017, bringing the full-year growth rate to 4% on unadjusted basis. Industry, construction, market-based services on the supply side, and household consumption as well as fixed investment on the demand side all appear to have contributed to this improvement from just 2.2% growth in 2016 markedly. The strong trend is likely to continue in 2018 as well, though some deceleration is essentially guaranteed by the industrial cycle getting closer to its peak, construction industry running into capacity constraints, and wage growth slowing down considerably.
The CPI-inflation picture remained quite benign in January, as there was very little upward adjustment in the area of regulated prices, and VAT was reduced on a few items, thanks to the ongoing election campaign. But the fundamental picture also looks quite favorable, as there continues to be a substantial net financing surplus on the BOP, keeping the forint strong against the euro. Besides, correcting oil prices and the continued weakness of the dollar are good for domestic fuel prices, and they also mean that the government’s stable-utility-tariff policy is not coming under pressure for the time being. We still expect CPI-inflation, currently at the lower end of the MNB tolerance range, to rise to 3-3.5% by end-2018, but the risk of any serious threat to the upper end of the tolerance range has been reduced to rather low.
January’s central government balance signified very loose fiscal policy, in a genuine election-year style. The government spent further unusually big amounts on EU-supported development programs, without collecting any reimbursement from Brussels during the month. The budget balance on other items also deteriorated markedly on yoy basis. The government financed the resulting cash gap in a great part by selling special bonds to domestic households, with above-market returns. A piece of good news, though, is the fact that the loosening measures put in place in early 2018 have remained largely within the framework of the approved annual budget. The government will likely push the spending pedal hard in the whole of Q1 and take back from the speed only after the election.
In spite of all the current global worries regarding financial markets and macroeconomic prospects, the MNB remains highly confident regarding the correctness of its loose monetary policy. The Bank is now saying that the base rate may remain untouched until end-2020 and money market rates could stay at their current level until end-2019. Our disagreement also remains, but its degree has decreased, especially as we see the risk of imported inflation much lower than a month ago. The MNB started to implement its new policies to reduce long-term yields in January, so far with partial success. In the coming months, the Bank is expected to continue selling long-term interest rate swaps and buying mortgage bonds from the secondary market, at yields markedly below those on government bonds.
S&P maintained its BBB-/Positive sovereign long-term rating for Hungary on February 16, in line with market expectation. On this occasion, the agency set criteria for its further rating actions, on the basis of which Hungary seems most likely to stay with its current rating in the rest of 2018. In general, we do not expect a further upgrade (or downgrade) from any of the major rating agencies this year.
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