More clarity about PM Orbán’s casting of key policy positions
PM Orbán has just revealed a bit more about his plans regarding key policy positions after Mr. Matolcsy’s expected departure from the MNB in March 2025. The other day, he said that one of his government ministers will take over the MNB, and another one will take responsibility for the newly re-merged economy and finance ministries. Though he did not mention names, everyone understood this so that finance minister Varga will likely go to the MNB, and economy minister Nagy, already the top policy figure in the government, will take over the current finance ministry tasks as well. Mr. Orbán also spoke about his ‘peace budget’ plans for 2025, most probably meaning looser fiscal policy ahead of the parliamentary election in 2026, and hinted he has no expectation of a breakthrough regarding Hungary’s access to EU funds. The forint moderately weakened on this news, but this negative potential appears limited by the fact that everything Mr. Orbán said was in line with long-time expectations.
The Ukrainian government repeatedly threatens with ending the transit of Russian oil and gas to Europe at end-2024. This poses a threat to Hungary in the context of crude oil imports. Even though Hungary would have an alternative route for oil imports, its sole refinery will not be technologically prepared to take only or predominantly non-Russian before 2026. Gas is much less of a problem (more so for other EU countries), as Hungary imports most of its gas from the southern direction. In practice, it is less likely that Ukraine will do exactly what it says anytime soon, as abruptly stopping oil and gas transit would hurt important EU interests and it could also threaten Ukraine’s own energy security. For example, Hungary exports much of gas, diesel fuel and electricity to Ukraine currently.
Detailed data on Q2 GDP suggests that the recovery trend seen previously halted because of the combined occurrence of four factors. These include weak external demand for cars and electric batteries, the negative impact of fiscal adjustment on fixed investment, the latest fallback of development transfers from the EU, and the negative impact of this year’s dry and extremely hot weather on agricultural output. Consumption, however, is doing better than claimed by official speakers and most analysts. The mainstream view still is that growth will likely accelerate in the rest of this year and in 2025, but it is increasingly difficult to see exactly how this could happen. One trend running against the prospect of faster GDP growth is that nominal wage growth has started to decelerate lately.
The forceful fiscal adjustment seen in recent months stopped in August, but the eight-month cash deficit was still much smaller than last year. The draft budget for 2025 is coming up in November, and we take it for sure that Fidesz is indeed preparing to loosen up fiscal policy again, to improve its reelection chances in 2026. However, no specifics on the draft budget has been revealed yet, and so it seems a bit too early to speculate on how big any loosening can be and in what way it may be implemented. We think that the room for such loosening will be significantly less than in 2022, because this time around there will be much less of supporting transfers from the EU, and as the external requirements to maintain fiscal discipline are much tighter now than in the immediate aftermath of the Covid epidemic.
Following a sizeable upturn in the previous month, headline CPI-inflation fell again in August, actually to the lowest level seen so far in this cycle. Even core inflation fell a little bit, although it is still well above the MNB’s target range. Prospects appear to be mixed: on one hand, wage growth has started to decelerate, and households’ inflation perception is decreasing, while on the other hand, perceived inflation is still quite high, producer and import prices are increasing again, and the latest data on the GDP deflator reflects a much less favorable overall inflation picture than the one shown by CPI-inflation figures.
The MNB held its base rate unchanged in August, but it is predicting one or two further 25 bps rate cuts for the rest of 2024, adding that at present, two cuts appear to them more likely than just one. We find that course of action quite likely, expecting one rate cut already in September and another one in November. As for the likely rate cut later this month, it may be justified by the August inflation data, the continuation of weak GDP growth and the forint’s stability at recent times, the latter supported by a near-balanced state of the BOP. On the other side, the MNB’s wish to maintain a significantly positive real interest rate is justified by the apparent conflict between government’s hopes to speed up GDP growth and the Bank’s aim to reduce inflation to its target level on a sustainable basis next year.
Relations between the EU and Hungary remain bad, as usual. Hungary’s six-month EU presidency is practically dead: the EU Commission and a number of member states are boycotting the informal meetings held in Budapest, and PM Orbán will have got the opportunity to hold his program speech in the European Parliament only after a long delay, in the second half of September. Responding to the tough financial penalty, by which the European Court has hit Hungary on migration policies, the government has just decided to sue the Commission for not sharing Hungary’s expenditure on protecting the EU’s common borders. On a more positive note, the government is preparing to pass through parliament an act with anti-corruption measures this autumn, which we hope will improve chances to get access to more of EU transfers than so far.
Domestic politics were quite uneventful in summer, except the new opposition leader Mr. Magyar diligently visiting various public service venues like hospitals and then railway lines/stations, making the government responsible for whatever shortcomings he observed during his trip. His Tisza Party managed to make a moderate gain of support since the European election, whereas Fidesz was most recently measured with exactly the same support level as its actual result in June’s election vote.
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