Oil embargo against Russia: a crucially important battle within the EU
Nearly two months after the election and three months into the war in Ukraine, none of the previously existing risks and uncertainties have been removed, and some problems even seem to have intensified. There is no new development on the now officially ongoing rule-of-law procedure against Hungary, but the overall relationship with the EU has deteriorated because of the existing sharp conflict over the intended embargo on oil imports from Russia. On the latter, an extraordinary European Council meeting in late May is unlikely to achieve a solution, and so far, there have been no publicly visible signs of progress in the related negotiations.
Other than this, the only real novelty in foreign affairs is the government’s marked shift of position on the assessment of the Ukrainian war, which was most recently reflected by the introductory statement of Hungary’s newly inaugurated president of the republic. This should be seen as part of political tactics, although, most likely with the predominant aim to improve the country’s standing in intra-EU relations, mainly within the CEE region, and most of all with Poland.
In domestic politics, Fidesz could not stand better than it does these days. Just as invariably happens immediately after elections, the domestic public is clearly pulling to the winner, with more people supporting Fidesz in the polls than those who actually voted for it. This phenomenon is reinforced by the widespread public perception that PM Orbán is doing everything to maintain peace, save the average citizen from the worst of global inflation and to protect the country from the EU’s aggressive attempts to damage the domestic economy by the oil embargo and the like.
A bit of a problem for Mr. Orbán is that the core of Fidesz camp, which has been carefully trained to follow a pro-Russia, anti-Ukraine view, is now perplexed by the shift in the official assessment of the Ukrainian war, clearly naming Russia as the aggressor. However, he has managed that carefully, putting most of the new foreign policy message into the mouth of the new Madame President, allowing supporters to put the blame on the latter in the social media. Of course, those assuming that the president of the republic may have a separate foreign policy view are completely wrong. She is entirely a Fidesz inner party member, even though a more lovable person than her predecessor.
Despite Fidesz's having been re-elected after ruling for twelve years, formulating the new government cabinet took nearly seven weeks, and during this period hardly any important policy decision was made. As a result, nothing really specific has been decided yet on the required fiscal adjustment, and the public has had to find satisfaction in some loose official talk on the possible ways of improving the fiscal balance, explained in terms of generalities. One point of certainty, for now at least, is the repeated official insistence to stick to the rather tough fiscal deficit target set for 2022. Meanwhile, central budget data for April reflected a slight improvement from Q1, whereas pensioners were granted an extraordinary increase in compensation for higher-than-projected inflation.
By the way, the significantly changed structure of the government cabinet mainly appears to reflect PM Orbán’s intention to centralize decision-making and reinforce central control even further. The new list of ministries and the distribution of tasks among them seem to be a bit chaotic, and the workability of the system is quite questionable without assuming a very strong central will and oversight from the supreme level. However, the average personal quality of the new ministers appears to be higher than before.
Much to the same likely effect, Fidesz started its new the government term by amending the constitution to include the legal case of a "war emergency", which was introduced immediately, with reference to the war in Ukraine. This legal tool allows the government to rule through decrees on an extended basis, and to deviate from parliamentary acts on issues that have to do with the basic condition behind its concrete use. This will bring about little change in practice, as the "war emergency situation" will replace still ongoing "health care emergency situation", maintained with regard to Covid, which is set to end on May 31.
So far this year, growth has been stronger than expected. Preliminary Q1 GDP was quite impressive, vindicating the moderately growing official optimism regarding prospects for the whole of 2022. This is especially important because of the expected major slowdown of growth later in the year, because of higher interest rates and a tighter budget, in addition to rising inflation, war impacts and weakening China.
However, the balance of payments was quite ugly in Q1 if one is looking at the external financing requirement and not just the current account and net capital transfers. Year-on-year deterioration was very substantial. However, we do not regard this as a trend, as the fundamental deficit of the BOP has been magnified by the temporary occurrence of an extremely loose fiscal policy recently. Deteriorating terms of trade, because of energy, is also a temporary factor, even though high energy prices are likely to persist for quite a while.
Inflation data and prospects continue to deteriorate. Even the MNB shares the view now that it is in an accelerating phase, and that consumer inflation is just about to enter double-digit territory. Repricing of a large number of goods and services has become unusually frequent lately, and producer price pressures have grown as well, especially for agricultural products. For the longer term, though, the official view is much more optimistic, insisting that inflation will take a downward trend again by this year-end and it will return to the MNB target level by end-2023. We find the former prediction quite possible, although far from being very likely, but the latter forecast just appears to be too optimistic. A key assumption now applied by all forecasters is that the existing administrative price control schemes will be maintained, which has been confirmed at the highest government level lately.
Despite the rapid upswing of inflation, the MNB does not appear to be aggressively fighting the trend by accelerating interest rate hikes or aiming at a stronger currency. Instead, they seem to continue raising interest rates progressively, following a preset schedule as much as possible, even allowing real interest rates to decrease and the forint to weaken against the euro. The Bank is of the view that it cannot fight global price shocks efficiently, and it appears to remain concerned about growth and its own balance sheet. The MNB has also continued to reduce the amount of forint liquidity in the banking system at a moderate pace.
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