The virus has returned for a second wave
Following the European trend, Covid-19 cases have picked up sharply since late August. Much of this can be blamed on increased virus testing, but that cannot explain a great part of the problem. Indeed, the hit ratio of testing has risen back to the record levels seen in Q2 and continues to rise. For now, the death toll remains low, and the health care system is reasonably far from coming under major pressure.
The authorities keep rejecting the idea of a renewed general lockdown. PM Orbán has stated that anti-virus measures cannot lead to another stoppage of the economy. Instead, the official approach is one of selective tightening, as and where required, combined with increased emphasis of general safety rules as face masks and social distancing. In addition, external borders have been closed recently for any non-business travel.
Despite all the progress made as to the efficiency of anti-virus policies, the risks continue to be high. Schools were reopened for the first time since this spring in early September, and the impact of this move on the virus's spreading is yet to be seen. A further risk is the prospective appearance of common cold and flue-like infections within a few weeks’ time, as soon as the weather turns worse from the current late summer conditions.
Recent data regarding output has been mixed. A positive detail in the otherwise bleak Q2 national accounts dataset was a substantial terms-of-trade gain made on low-priced energy imports, which helped nominal GDP and the balance of payments. More recent numbers hinted at an encouraging recovery of both consumption and industrial output so far in Q3, even though current performance remains markedly below previous year’s levels. Employment has also improved this summer, but only to a very small extent.
The current main problem is not so much the pace of the recovery during summer, but much more the prospect that the renewed closure of borders will likely set back the hospitality industries and all the related areas. This will most certainly contain the speed of further normalization over the rest of this year.
There has been little change in the balance of payments situation recently. On the positive side, July was the second consecutive month with faster growth in merchandise exports than in imports. This should be seen as a material compensation for the existing weak economy.
On the policy front, the Finance Ministry threw a big stone in the lake by doubling its forecast for this year’s fiscal deficit in late August. This required a major amendment of the annual financing plan. The backbone of the plan remains the massive net issuance of HUF-denominated bonds to institutional investors, the sale of which will likely be actively helped by MNB purchases and collateralized loans extended to banks. The annual target for FX bond issuance has not been raised further, and the target has been met by the issuance of samurai bonds in the first half of September.
The actual eight-month deficit of the government budget was materially smaller on an annualized basis than the revised official forecast. Our impression is that after three revisions already announced this year, the government just did not want to risk the need for another one, in case prospects for the economy turn nastier, together with Covid-19 events, during the rest of the year, which would require a significant intervention by fiscal policy.
For now, there is no trace of massive additional government spending, despite the clear prospect of a slowdown of economic recovery. Most of the temporary policies introduced to deal with the impact of Covid-19 in Q2 have expired already or are just about to expire shortly. PM Orbán said a few weeks ago that he had ordered a draft macroeconomic policy plan for the period between now and end-2022. This plan was then expected to be available by mid-September, but so far, no details whatsoever have been disclosed.
The massive amendment of the official fiscal deficit forecast put the forint under some pressure from late August. This pressure was increased further by Covid-19 events, by a statement by MNB Governor Matolcsy that it is the right thing for the government to borrow substantially more between now and end-2022, and by a further moderate rise in inflation and core inflation in August.
As core inflation is materially above the MNB’s tolerance ceiling currently, the August inflation data required some MNB tightening. Given the weak economy, the Bank is not particularly keen on this, yet it responded by announcing the introduction of a reverse FX swap instrument. The market took this announcement as a forint-supporting step, and so the weakening trend of the forint was stopped below EURHUF 360 temporarily.
Events within the EU still have not accelerated after the summer break, but this may change soon as the European Council is bracing for an extraordinary summit on September 24-25. For Hungary, the stake remains the triangle of the EU budget, the rule-of-law mechanism attached to it and the ongoing Article 7 procedures against Poland and Hungary.
In terms of preliminary events, a recent OLAF report on the regularity of the use of EU funds and recent news on the state of domestic democracy have been bad signs for Hungary. To counter the standing demand from the European Parliament, PM Orbán is reportedly threatening to veto the Next Generation EU instrument if a tough rule-of-law mechanism is insisted upon. In addition, he has recently stressed the leading role of Poland within the V4 Group, apparently to strengthen his alliance with the Polish government ahead of the autumn round of EU decision making.
In domestic politics, the opposition has taken a low profile so far in criticizing Fidesz for its treatment of the Covid-19 crisis, possibly in view of the various ways such behavior could backfire. This has left Fidesz’ attempts to contain democracy predominant on the domestic political scene in recent weeks.
The latter included an attempt to block the opposition’s candidate for the interim parliamentary election in early October, an announcement on the intended withdrawal of another independent radio station’s license, and the continuation of the events around the Budapest University of Theatre and Film Arts. Regarding the latter, Fidesz ran into unexpectedly stiff resistance by teachers and students, and a major street demonstration in Budapest, which earned considerable international publicity, with negative reflections on related Fidesz policies from intellectuals around the world.
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