Rapid growth and moderate inflation
The odds for the April parliamentary election have become slightly more even since a candidate supported by all opposition parties won against Fidesz in an interim local election held in late February. This event has increased the willingness of opposition parties to cooperate in the national vote. Since then, however, it has become clear that no real breakthrough can be expected in this regard. Just three weeks before the election, chances for mutual withdrawals of weaker candidates appear limited, and opposition parties are likely to compete with one another in many of the 106 constituencies, in which the fate of 53% of all parliamentary seats will be decided.
Electoral support for Fidesz dropped marginally in February, but the picture reflected by opinion polls remained essentially unchanged. Supporters are roughly equally distributed between Fidesz and its opposition, but the latter is still highly fragmented. As a result, the real question for the April election still appears to be whether Fidesz can acquire a constitutional majority or not, rather than its ability to continue to govern. In terms of campaign efforts, Fidesz is using fiscal measures and stressing the risks of immigration, whereas opposition parties are focusing on corruption issues. However, all these efforts achieved recently was the stabilization of political preferences.
Internationally, PM Orbán’s government is not doing particularly well. As soon as the new German cabinet was set up, Mme Merkel announced a proposal to allocate more of the EU cohesion policy funds to member states that are ready to receive big numbers of refugees. Besides, there is an increasing number of proposals that the allocation of funds in the EU’s 2021-2027 budget should be made dependent on member states’ policy record regarding democracy, human rights and corruption at home. Finally, more EU funds are likely to become available for those member states that commit themselves to introducing the euro within a few years' time. All this suggests that Mr. Orbán will likely be in a difficult position once the EU Commission comes forward with its budget proposal in early May.
In terms of general international publicity, Mr. Orbán is not doing any better. Following a harsh reaction to the government’s campaign by Mr. Soros, the designated Public Enemy No. 1, and the failed interim local election mentioned above, the government scaled back its aggressive domestic anti-Soros drive, but quickly replaced it with a new conflict, this time with the United Nations, which is currently working on proposals to make life easier for refugees. Following an unfortunate statement by Mr. Orbán, the UN’s High Commissioner for Human Rights publicly called him a xenophobe and racist, reinforcing an already existing negative international picture of him and his government. This can be hardly offset by the fact that Mr. Orbán may be right on a number of issues regarding migration policies.
The final Q4 2017 figure for GDP growth was a marginally revised 4.9% yoy, sda, leaving the full-year growth rate at 4% on an unadjusted basis. This was roughly at the middle of the CEE EU-members’ league table, as growth was propelled by the ongoing Euro Area recovery everywhere in the region. The most impressive development was the gradual build-up of household consumption growth in 2017, to 5% yoy in Q4, for long the fastest expansion in that area. Regarding early 2018, both industrial output and retail sales reported very strong data in January. PMI/IFO data fell in February after a strong start in the previous month, but it still remains around historic highs both in Europe and in Hungary.
Headline rate CPI-inflation fell to 1.9% yoy in February, due to a base effect, correcting international fuel prices, the weak dollar, and the impact of aggressive post-Christmas discounts in the retail sales of consumer durables. This was an excellent result, even slightly undershooting the MNB’s latest forecast for the average of Q1 2018 inflation rates. The producer price picture also became somewhat more benign than previously, as the previous sharp rise of agricultural prices slowed a bit lately, and foreign trade prices decelerated as well, joining the service sector as areas cooling domestic inflation markedly. However, Q4 2017 national accounts deflators appear to be much higher than CPI-inflation, in addition to suggesting that one or more of them happened to be underestimated on the demand side.
The general government’s net financing requirement was reported at 1.9% of GDP for 2017, just slightly up from the previous year, despite a sharp upturn of the central government’s cash deficit, reported earlier. This was no surprise, however, and found its explanation in the subtleties of the accounting of EU development programs. More recently, February brought about another big, although not extreme, cash deficit. Clearly, the government is making all sorts of efforts to gain more political support for the election, including the accelerated distribution of EU funds, and three above-budget fiscal measures targeting households directly.
Economy Minister Varga made an interesting policy statement, in which he promised 250-300,000 new jobs and zero budget balance in cash terms by 2020. Achieving the first target would essentially cut the unemployment rate to zero, and so it looks close to being impossible. Given the likely development of EU cash flows at a time when no further disbursements are possible but reimbursements from Brussels should still arrive, the latter target is not necessarily out of reach, but it would not automatically mean any significant improvement in the fiscal balance in accrual terms. Mr. Varga may have intended to make good-sounding campaign promises and calm down investors at the same time.
Enjoying the sunshine that glows from the excellent CPI/GDP data, the MNB continues to be quite relaxed, keeping interest rates low and working on the implementation of its most recent MIRS and asset-purchase programs. But the Bank is not going for big game. Apart from not making any changes in interest rates, they are proceeding without haste towards meeting a not-too-ambitious Q1 target for MIRS, in addition to also moving cautiously with the purchase of mortgage bonds. In February, the net sales of "fine-tuning" FX swaps was a moderately negative number, and this has not been corrected in any significant degree so far in March, either. Our impression is that the MNB’s current absolutely informal short-term exchange rate target, if it existed at all, would be EURHUF 310-314, a range, which seems consistent with keeping the net financing surplus moderately positive and roughly stable.
On March 9, 2018, Fitch Ratings also affirmed its BBB-/Positive sovereign long-term rating for Hungary, in line with market expectation. The agency mentioned, as factors preventing an early upgrade, relatively high public and net external debt, high policy unpredictability and macroeconomic volatility, saying that the country’s improving trend regarding these aspects is properly reflected by the positive outlook attached to the rating. We still do not expect a further upgrade (or downgrade) from any of the major rating agencies this year.
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