Some bad news on the budget, after a previous series of good news

HUNGARY - In Brief 07 Mar 2017 by Istvan Racz

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The planned Paks-2 nuclear power plant finally passed all licensing hurdles in Brussels the other day. This means that the implementation of the EUR12bn project is going to start already this year. The aim of the project is to build two new 1200MW reactors by 2026, in a great part to replace the existing Paks-1 power plant (4*440MW), the operating license of which will expire by 2036. Paks-1 currently satisfies over 40% of Hungary's domestic electricity consumption.As the 2024 Olympic Games luckily appears to be out of the way - given the government and the City of Budapest have decided to withdraw Hungary's application recently - the single biggest risk item in the country's long-term fiscal framework remains the Paks-2 project. One problem is that nuclear power plants tend to be invariably much more costly than originally expected. Another one is that even if the project budget is met, wholesale electricity prices much higher than the current European level will be required for Paks-2 to operate profitably. A third problem is that the investment will be financed out of the government budget, representing a major burden on fiscal policy, and a fourth one is that 80% of the investment will be financed out of an inter-governmental loan provided by Russia, at a cost markedly higher than what the Hungarian government could currently get on the market.This is quite a lot to worry about, we think. The government expects to spend HUF200bn (0.55% of GDP) on the Paks-2 project already this year, exactly half of which has been actually budgeted in the annual fiscal plan. As the project's implementation speeds up from next year, the annual fiscal cost will rise to 1-2% of GDP, a...