Pandemic Crisis Hits all Sectors

MNB

MTI/Tamás Kovács

“V”, “U” or “L”? Only time will tell which shape the current crisis will take, but one thing is for sure: upgraded forecasts of this year’s GDP growth for Hungary are a thing of the past. The question now is how well the government’s economic package will work and for how long will it needto be deployed.

Prime Minister Viktor Orbán addresses the plenary session of the National Assembly on March 23, 2020. To the right in the background is Péter Harrach, a leader of the Christian Democrat (KDNP) faction, wearing a facemask due to the coronavirus epidemic. Rather than political debates, it is time to unite, the PM said. Photo by MTI/Tamás Kovács.

Desperate times call for desperate measures; that could be the motto of these days when a pandemic sweeps across the globe, forcing people to change their lives and habits overnight, and new measures that we could not even imagine before are being introduced every day.

Economies of the world are trying to adapt to the new situation, without even knowing what the next day will bring and for how long this period of emergency will last.

While many hoped for a “V”-shaped crisis, where a sharp decline is followed by a quick upturn, now it seems that it will take longer for the global economy to recover, and Hungary is obviously no exception.

Both global and domestic recession seems to be unavoidable now; the question is how long the pandemic and its devastating effects will last.

Governments all around the world have introduced stimulus packages to keep the economy afloat and the Hungarian government has also come up with measures that it hopes will help individuals and enterprises to weather hard times.

The European Union has also done its part by announcing a coordinated response to counter the economic impact of the coronavirus. According to the plan, the EU, not applying its regular allocation system, will give money directly to the member states in order for them to fight the coronavirus epidemic and restart their economies.

Keep the Economy Afloat

On March 18, Prime Minister Viktor Orbán revealed five measures aimed at protecting Hungary’s economy and employees from the negative effects of the pandemic.

The government has imposed a moratorium on all loan repayments for individuals and companies until the end of the year.

Short-term business loans will be extended until June 30, and the interest rate on all new consumer loan interest rates will be capped at the central bank’s base rate plus 5% maximum. With the base rate currently at 0.9, that puts the maximum interest rate at 5.9%.

Sectors hit hardest by the pandemic include tourism, hospitality, entertainment, culture, sports and transportation. In order to ease the shock, the government introduced measures such as tax exemptions. Employers in these sectors will be exempt from paying payroll taxes until June 30.

Employees will also see a reduction in their required contributions, including a moratorium on pension contributions. Health insurance premiums will be capped.

The new rules forbid the termination of rental contracts and place a moratorium on rental price increases. Tourism development contributions are suspended until June 30.

A week later, additional steps followed the first package in order to keep small- and medium-sized enterprises in business or minimize their damages.

According to the new measures, more than 81,000 sole proprietors and businesses registered to pay the Itemized Tax for Small Businesses (KATA) would be exempt from monthly tax payments until the end of June. The measure applies to trades such as hairdresser, cosmetician, plumber, gas-fitter, carpenter, sports trainer and home care provider.

Orbán also said evictions and forfeiture of property would be suspended until the end of the state of emergency. Eligibility periods for mothers who are currently on child leave will be extended until the end of the state of emergency.

Banks to get Extra Liquidity

It was not only the central government; the National Bank of Hungary (MNB) also took action in order to provide the necessary liquidity for the banking sector. On Tuesday, new measures were introduced to boost liquidity, while the Monetary Council left the key rate unchanged at 0.9% at its rate setting meeting.


The MNB also decided to introduce a new fixed-rate collateralized loan instrument. Lending will be provided at a fixed interest rate by the MNB with unlimited liquidity.

“To address the challenges posed by the pandemic, it is key to ensure the required level of liquidity. In order to preserve effective monetary policy transmission, the Monetary Council is ready to take further measures to provide additional liquidity,” the rate-setting Monetary Council said in a statement.

Shape Matters: a Lot

The central bank now expects inflation to slow to 2.6-2.8% this year, below its previous forecast. It also revised its growth forecast; now it says that the economy would slow in the first half of this year, but rebound later. In light of the announced measures, it seems that the central bank has shifted focus.

“The bank, for the time being, focuses on providing sufficient liquidity for the banking system and the markets, and has not yet decided on bond buying in the secondary market,” CIB analysts reacted to the announcement.

The central bank has already boosted short-term market liquidity via its FX swaps and broadened the range of permissible collateral with corporate loans, helping the country’s banks, in a separate move last week.

According to MNB Deputy Governor Márton Nagy, Hungary’s base interest rate is still the lowest in the Central European region, and monetary policy continues to be the most accommodative. He said GDP growth could slow to 2-3% this year as a result of the coronavirus pandemic and its economic fallout. In an optimistic scenario, however, the economy would bounce back relatively soon.

“The base scenario is a ‘V’-shaped recovery, for which we need to do a lot (to make it happen) [….] and it is surrounded by very big uncertainty,” Nagy told an online news conference.

He said if the crisis lasts until the end of the summer, or until the fall, then this year’s GDP growth could be much lower and in that case a “U”-shaped recovery could become more likely.

The deputy governor also said that the goal now was to preserve the potential GDP growth over the long-term. He emphasized that the fallout from the coronavirus crisis could hit all sectors of the economy.

Numbers to Watch in the Coming Weeks

The KSH publishes the February data of the Hungarian industry on April 7, and will also release figures on Hungary’s accommodation establishments; both industry and the tourism sectors are badly hit by the pandemic. More relevant data is the consumer price index for March, to be published on April 8.

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