Rising energy prices are affecting the BOP, inflation, central bank policy and growth
The renewed rise of oil and gas prices is set to have a moderately negative effect on the BOP, inflation and growth prospects, as well as on central bank policies. No major revision of plans seems to be needed, but the MNB will likely become keener to keep the forint stable in the short term, possibly slowing down monetary easing in the rest of 2023.
It is important to state here that the domestic supply of energy is in no danger whatsoever, regardless of higher import costs. Both European and domestic gas inventories are at very high levels, supplies of electricity appear abundant, and even access to oil and fuels appears to be a matter of cost, rather than one of quantities, in short term.
In hindsight, Q2 GDP was depressed predominantly by a major setback to fixed investment, driven by fiscal restrictions, weakening housing construction and some deceleration of development spending in the business sector. The limited data currently available for July shows a minor pickup in construction and a decreasing fallback in industry, the latter despite further robust expansion in car manufacturing.
CPI-inflation continued to fall markedly in August, yet it caused some disappointment among politicians and analysts, probably because the positive impact of the government’s new online price-watching instrument was overestimated and the effects of the termination of food price caps were somewhat underestimated.
Year-on-year headline inflation is set to fall substantially in September, most probably to slightly below the MNB base rate. This will be due to the unusually large base effect caused by the gas and electricity price reforms, implemented one year earlier. Friendly and powerful base effects will remain for each month in the rest of 2023. Rising fuel prices will have an impact, but the target of reaching single-digit CPI-inflation by year end is unlikely to get into any serious danger.
The generally favorable BOP picture remained pretty much unchanged in July, except for a material improvement by net FDI flows. But even so, the latter was still significantly negative in the first seven months, leading to a basic balance deficit considerably bigger than the one recorded one year earlier. This dark spot on the financial account is somewhat disappointing, especially against the backdrop of a massive positive change in the trade balance and of the recently expressed official hope to rely more on FDI inflows as a substitute for inaccessible EU development transfers.
The government’s cash budget showed only minimal improvement in August, leaving behind much doubt as to how the fiscal deficit could reach the annual target in the rest of 2023. Even more perplexing is the official insistence on the end-year gross debt ratio objective, as ÁKK has just revised its annual net financing requirement significantly upwards, to make room for a major asset purchase, the planned acquisition of a majority stake in Budapest Airport.
Just as expected, the Monetary Council reduced the O/N deposit rate further, unifying it with the base rate, at its late-September meeting. In its post-meeting communication, the Council kept the door open both to the continuation of rate cuts at the same speed as so far in Q4, and also to reducing their pace if needed, to maintain the trend of rapid disinflation through positive real interest rates and a reasonably stable EURHUF exchange rate.
There are still no new developments on EU funds. The government is certainly not working on any new reforms to facilitate a positive decision by the EU. The EU Commission is expected to give an opinion on the government’s early summer legal reforms of the judicial system before mid-October. Given all known circumstances, even small progress towards access to EU transfers would count as success in this case. Hungary finally decided to apply for only less than half of its RRF loan quota. But to get those amounts, rule-of-law requirements would also have to be met first.
Meanwhile, events in foreign relations include Ukraine’s turning to the WTO because of Hungary’s insistence on banning a wide range of agricultural imports from them, a continued stalemate on the ratification of Sweden’s NATO membership, and the government’s anger over Ukraine and Croatia raising oil transit fees, the latter instead of extending pipeline capacities. Also on an energy-related foreign policy issue, PM Orbán recently mentioned that Russian supplies of nuclear fuel could be replaced by French ones in the future. However, the existence of such plans were later categorically denied by his press office, despite a cooperation agreement signed with French Framatome on nuclear matters almost simultaneously.
Finally, despite the government’s systematic "it is all someone else’s fault" propaganda, popular support for Fidesz continued to stand at a post-election low in August. Most lately, PM Orbán openly acknowledged this fact, saying that this phenomenon was due to the recent economic hardships. Once the latter have been sorted out, support levels will be also corrected, he said.
Now read on...
Register to sample a report