A Rather Weak Start for 2016
Growth prospects for 2016 still look quite bleak, given the combination of sluggish external demand with the currently unfolding impact of this year’s EU transfer shock. In fact, the economy started 2016 in a rather weak mode. We expect GDP growth to strengthen from 2% in 2016 towards 3% in the following two years, on an expected recovery of the EU transfer flow and looser fiscal policy as the 2018 election ap-proaches.
This growth forecast depends greatly on the amount of EU transfers distributed in 2016-2018. The official plan to use up all allocations for 2014-2020 by early 2019 seems too ambitious and highly controversial. We think this year’s distribution target is not feasible, and achieving the three-year target should lead to a rising government debt ratio by 2018. Should the targets be met, GDP growth would likely be markedly higher than our forecast in 2017-2018, but necessarily followed by a collapse of growth in the following few years.
Fiscal policy tightened markedly in Q1 2016. To what extent this will be permanent or the approved budget be implemented is currently unclear, and so are further plans, due to spectacularly inconsistent government talk on fiscal targets and related future projects. More clarity is expected in late April, when the 2017 budget plan and the annual convergence report are to be published.
Headline CPI-inflation became negative again in March, depressed by fuel prices. This is likely to remain so, on base effects, through July. Going forward, both core and headline inflation will likely rise, converging to 3% by end-2018. This forecast as-sumes rising crude oil prices and the MNB’s success in keeping the forint on a mod-erately depreciating trend against the euro.
The MNB continues its fight against the strong forint. The Bank resumed interest rate cuts in March and raised the importance of the O/N credit rate against the base rate. Further rate cuts – to by 1% by June in our view – have been essentially promised, in view of the existing inflation outlook. The Bank also made a big step towards de-sterilization in March, as maturing FX swaps vis-à-vis domestic banks were followed by a sizeable reduction of official FX reserves. The latter was part of the MNB’s plan to reduce its balance sheet, and the Bank believes the level of FX reserves is still higher than adequate.
We still believe that a credit upgrade back to investment risk is more likely than not before end-2016, in view of decreasing external vulnerability and a relatively tight fis-cal policy. However, a major slowdown of GDP, the lack of consistent and proper fiscal plans and the inability to prop up bank lending are seen to work against an early positive decision by rating agencies.
Fidesz is looking ahead to a difficult period. Migration policy, a success area, has lost importance, and problems are building up domestically. The government has failed to tame protests by teachers, and is facing strikes and demonstrations. A Su-preme Court decision opened the way for a referendum motion put forward by Social-ists, and the MNB’s attempt to hide its foundations from public eyes has been de-clared unconstitutional. The latter casts doubt on the Constitutional Court’s and the President’s loyalty to Fidesz.
Now read on...
Register to sample a report