Hungary’s Economic Problems far From Over, but New Year Trends Boost Sentiment

Analysis

Zoltán Török, head of research at Raiffeisen Bank Hungary.

For Prime Minister Viktor Orbán, 2022 had, as he put it, “probably been the most difficult year in Hungary since the fall of Communism, definitely as far as my memory goes.”

Speaking at a pre-Christmas press conference, Orbán, as is his wont, put much of the blame for Hungary’s woes on the war in Ukraine, omitting to mention that inflation, for example, was on the rise and hitting 8% before the Russian invasion in February last year.

True, the difficulties increased through the year: headline inflation in Hungary hit 22.5% in November, the highest in the European Union. Hungary’s economy, suffering from the effects of the drought-hit agricultural sector, grew in the third quarter by 4% year-on-year, but that still meant a small, 0.4% contraction against the previous quarter, according to Central Statistical Office data.

As both businesses and households grappled with sky-high energy prices, industrial production stalled, slipping 0.7% in November on October (which, in turn, was 3.6% down on September), indicating the likelihood of a second consecutive GDP contraction in the fourth quarter of 2022. This would tip Hungary into a technical recession.

The signs of the downturn are visible to all: In the capital, of the 662 shops on the Pest side of the Grand Boulevard (Nagykörút), 129, or a fraction under 20%, are closed, according to a survey by the website G7.

Even the popular malls are not exempt from the trend, as a walk around Mammut, in prosperous District II, revealed early in January. (Unlike on the Nagykörút, vacant units in malls are somewhat disguised, artfully decorated, and used to advertise other retailers, but vacant they remain.)

On the political level, protests and civil disobedience action by teachers protesting against low wages and working conditions reached new levels in January: any climbdown by the government on the salaries issue would hit the 2023 budget expenditures, and this after the government itself raised the deficit target from 3.5% to 3.9% of GDP at the end 2022. And yet, going into the New Year, there is definite cheer for the economy.

Dramatic Tightening

Most impressively, after massive pre-election spending early last year appeared to be propelling the budget deficit well beyond even the revised 6.1% target, a dramatic fiscal tightening reversed the trend.

This means, as OTP Research analyst Gergely Rezessy and chief economist Gergely Tardos put it in an early January note, “the 6.1% deficit target for 2022 is easily within reach, even with a sizeable deficit in Q4.”

(Interestingly, OTP Research also noted in December that the war in Ukraine had, at least up to the third quarter, minimal effect on Hungary’s exports. “This is mainly because the EU economies also showed stronger-than-previously-expected resilience against the effects of the war, while the easing of the global supply chain problems helped the revival of vehicle production,” the team reasoned.)

Progress on the budget deficit apart, arguably the most critical influences on the economic outlook were the twin effects of falling energy prices on world markets and the “partnership agreement” on access to European Union funding signed with the European Commission in late December. (See “Navracsics Delighted by EC agreement, but Funding Dependent on Conditionality” on page eight for more on this.)

This resulted in the forint strengthening by some 5% month-on-month, to around HUF 396 to the euro in early January. Against the greenback, the rise was even more pronounced, the forint gaining almost 7% to around HUF 371.

These gains, in turn, will help to limit the burgeoning balance of trade and current account deficits and, critically, also help curb inflation, at least by the spring. As it stands, analysts have been predicting that the consumer price index will likely rise towards 25% in the new year, partly due to the government scrapping the price caps on auto fuels. (December inflation data is due to be published on the day this issue of the Budapest Business Journal is published, January 13.)

Moreover, the government debt agency exploited the positive mood by initiating a bond auction worth USD 4.25 billion in the first week of January. Minister Finance Mihály Varga said the issue, which was three times over-subscribed, showed investor confidence “is still strong” in the Hungarian economy, emphasizing that even after this auction, Hungary’s foreign-denominated state debt remains less than 30% of the total. (The previous targeted level was 25%.)

Significant Bond Issue

Political rhetoric aside, in view of the risks ahead, the bond issue was significant, according to Zoltán Török, head of research at Raiffeisen Bank Hungary.

“I think it’s important. I assume that EU funds will not come seamlessly; there will again be some disputes, political issues, rule of law, gender issues [….] so, I think this whole problem over EU funds has not been resolved. And at the same time, the government needs some funding, so it’s important that in this period when the market environment was quite benign, they could make this big bond auction. Maybe times will not improve, maybe the other way round, but anyway, it was important to build the safe side and secure this funding,” Török tells the BBJ.

In his assessment, the agreement with the EC and the lower world energy prices were equally responsible for the forint’s appreciation since early December.

“At least we haven’t lost the EU funds [….]. That is important. Although it’s not that everything is fine now, after many, many months of no progress, [we now see] at least some progress,” he says.

As for the lower energy prices, this has a significant impact on Hungary, Török argues.

“It’s a big issue as to whether the energy trade balance is going to be EUR 20 bln this year or EUR 10 bln. The market is very optimistic now because, really, Hungary’s main problem – of course, there are many problems – but maybe one of the top-of-the-list items is this very high energy prices and the fast deterioration of the trade and current account balances, and that has become a big concern out of almost nothing last year,” Török notes.

Naturally, in early January, forecasting energy demand is a tough call, but, as the Raiffeisen researcher emphasized, the current mood of the markets is double-acting on Hungary, given the role of exports in the economy.

“The mild winter and low energy prices help the whole European economy, and apart from that, inflation data is coming down in Europe; not in Hungary, but in other parts of Europe, and that’s positive,” Török argues.

But, lest anyone should get too exuberant, he quickly cautions: “I don’t think it’s gonna last long, but at least that’s it for now.”

This article was first published in the Budapest Business Journal print issue of January 13, 2023.

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