Weakening growth and currency, exploding inflation: a more colorful picture than so far
The macro picture has become more dynamic and colorful over the past month than previously. The most recent data marks a downward adjustment in industrial output, the most export-driven part of the economy, and more may be coming if the coronavirus problem sets back the Chinese economy to a serious degree. This is combined with a cooling of the formerly very strong construction industry, due mainly to domestic reasons. However, this slowdown in industry and construction has left the whole economy strong, as suggested by Q4 GDP data, the labor market tight, wage growth extremely high and retail sales growth robust.
Another key trend has been the forint’s weakening against the euro, with HUFEUR hitting historical lows several times in recent weeks. This was most probably caused mainly by super-loose domestic central bank policy. According to the latest monetary data, the MNB generated unusually large sums of forint liquidity in December, depressing money market rates and triggering outflows in early January.
The third major recent event was the unexpected explosion of CPI-inflation in January, to a new seven-year high and far above the MNB’s tolerance ceiling. Core indices reflected a much smaller rise, as a large part of the January spike came from food and fuel prices. The MNB still expects the headline rate to fall back into its tolerance range within the next two months. We agree with this view, except that the Bank’s forecast appears to be more in line with a stronger forint than the current EURHUF exchange rate.
The MNB probably came to a similar conclusion, as suggested by its most recent efforts to tighten liquidity, and to halt forint depreciation, in small but regular steps at its weekly FX tenders over the past five weeks. These steps resulted in increases in swap yields and BUBOR rates and the stabilization of the forint at a level stronger than EURHUF 340. However, the Bank seems to be content with this situation, as it has not adopted any further tightening measures as yet. Despite the January inflation surprise, it is preparing to review its forecast and policies only in late March, promising to continue tightening through the FX swaps until then.
In fiscal policy, there have been no trend changes recently. The central government started the new year with a relatively strong cash balance in January, after closing last year with a substantial reduction of the gross debt ratio.
S&P improved the outlook on its BBB sovereign rating for Hungary to "positive" from "stable" in mid-February, expressly referring to the possibility of an upgrade within the next 24 months. At the same time, Fitch Ratings kept its BBB/stable rating unchanged. Moody’s is scheduled to review its Baa3/stable rating for Hungary on March 27.
In foreign politics, Fidesz weathered the European People’s Party’s political assembly in early February as expected. There was no majority for ousting Fidesz from the party family, not least due to a contrary view of German conservative parties. However, Fidesz remains suspended in the EPP, meaning that PM Orbán is not invited to the meetings of EPP party leaders, where the really important decisions are made. The next key milestone in EU matters will be the European Council’s EU budget meeting on February 20. We still expect Hungary’s transfer quotas to be heavily curtailed, but some improvement of conditions may be achieved in last-minute deals.
In domestic politics, Fidesz has lost a bit of its former support recently, with those ceasing to support the party ending up scattered among opposition parties and in the undecided crowd. The fight between Fidesz and its opposition continues at the local government level. Fidesz keeps finding new legal ways to deprive local governments of revenues and of their freedom to do their job. In exchange, the opposition keeps bringing up past cases of corruption and mismanagement under former Fidesz local administrations, and they are trying to convince the public that Fidesz policies are aimed at undermining local public services. All this is likely to go on in largely the same way over the next few years.
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