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Tie Strings Loosened on Deficit Target

Apparently wedded to the idea of a “V”-shaped crisis, the government has updated its EU Convergence Program, stating that this year’s recession will be followed by a quick recovery. However, the European Commission paints a much darker picture about the near future of the Hungarian economy.

Following a 2% deficit last year, the Hungarian government has raised its budget deficit goal to 3.8% for 2020 in order to tackle the likely recession this year caused by the novel coronavirus pandemic.

According to the updated Convergence Program, the government has submitted to the European Union, the economy, which produced a robust growth of 4.9% last year, will shrink by 3% in 2020.

“The deficit, considering the fiscal impacts from the crisis management and recovery measures and the temporary recession in 2020, will remain at a relatively low level, and is expected at 3.8% of GDP this year,” the document reads.

As for the significant setback in the output of the Hungarian economy, it is mainly caused by the delayed or canceled investments. Also, the updated convergence program calculates with an 8.3% decrease in exports and 6.8% setback in imports.

In the meantime, household consumption might further increase, albeit at a slower pace, only by 0.9% after last year’s annual growth of 5%.

V for Victory?

The updated figures for the Convergence Program show that the government still embraces the scenario of a “V”-shaped crisis: following a massive fall this year, it projects a strong rebound in the next few.

In 2021, annual GDP growth is set at 4.8%, and growth rate of more than 4% is expected between 2022 and 2024. Following a slowdown in the falling trend of the sovereign debt to GDP ratio this year, the tendency is expected to return in 2021, and in 2024 the debt rate could fall below the 60% benchmark value.

“Thanks to the economic policy of recent years, in March the virus met with a resistant economy that had a balanced structure, and accordingly the rebooting of the Hungarian economy may also be successfully assisted by the economy protection measures,” the Ministry of Finance said in a statement on the updated Convergence Program.

The fresh spring forecast from the European Commission is not so optimistic: published on May 6, the prognosis is that a sharp decline will hit the Hungarian economy in 2020, which will be followed by a gradual recovery.

“Before COVID-19, Hungary’s economy was on track for a gradual slowdown after several years of outstanding growth. Real GDP rose by 4.9% in 2019, and the first monthly indicators in 2020 signaled continued momentum,” the document says.

Muted Policy Response

Obviously, as the EC noted, economic performance in 2020 is expected to depend on the health impact of the virus, the sectoral specialization of the economy, and the economic policy response.

It acknowledges the initial policy measures that have focused on liquidity provision, including a debt moratorium for all borrowers until the end of 2020, but says that the overall fiscal policy response has been muted so far.

According to the EC, the liquidity support and temporary job protection measures offered to companies are likely to provide limited containment only; therefore, household consumption is expected to fall sharply, and thus declining demand and high uncertainty are expected to reduce private investment.

As a result, GDP is projected to decrease by 7% in 2020, while unemployment rate could rise from an annual average of 3.4% in 2019 to 7%, the EC estimates.

In 2021, a partial recovery will follow the sharp decline in 2020. The EC expects the Hungarian economy to expand by 6% in 2021, and says that unemployment rate could fall back to 6%.

However, the output of the economy could remain below its 2019 level, as external demand and tourism flow is expected to recover only gradually. Also, elevated unemployment and a delay in the return of household consumption could also delay the rebound.

The EC emphasizes that there are both upside and downside risks to the projection. It says that more vigorous fiscal policy support could limit the economic fallout in 2020 and hasten the recovery in 2021. On the other hand, it warns that a wave of corporate bankruptcies could weigh on the recovery by restricting job creation and lending.

From Positive to Stable

S&P Global Ratings has affirmed Hungary’s “BBB” sovereign rating but changed the outlook to stable from positive because of pandemic-related risks, state news wire MTI reported. According to the credit agency, if the economic downturn results in a more permanent weakening of Hungary’s public finances that would put state debt on a firm upward path, or if it puts pressure on Hungary’s balance of payments performance, S&P could weigh a negative rating action. On the other hand, if, following the temporary shock, Hungary’s economic performance were to return to its previous strong trajectory, boosting its income levels without creating external or fiscal imbalances, S&P could consider a positive rating action. S&P projects Hungary’s economy will contract by 4% in 2020, but noted that the government and the central bank have introduced measures to cushion the impact of the pandemic on the economy.

Numbers to Watch in the Coming Weeks

A second estimate of Hungary’s industrial production data will be published on May 13, with the first estimate due to have been published yesterday (Thursday, May 7). The numbers apply to March, and are already expected to show the effects of the pandemic. The March performance of the construction sector, also affected by the virus, will be released on May 14. The most awaited figures will come out the very next day, when KSH publishes the first quarter GDP data on May 15.