Credit upgrade to BBB is not happening yet
In August, both Fitch and S&P failed to upgrade the government from BBB-/Positive in their pre-announced review dates, in line with market expectation but contrary to the hopes of high-ranking officials in Hungary. We think that no upgrade from a major agency is likely any time soon, especially because of the prospective sharp cutback on EU transfers in the next few years, and the resulting need for Hungary to implement a corresponding fiscal consolidation. However, Moody’s may improve the outlook on its Baa3/Stable sovereign rating in November, following a comment in praise of the MNB’s recent prudential measure to manage the interest rate risk of domestic banks' mortgage lending.
After a forceful campaign start for the June 2019 European Parliament election, PM Orbán recently met Matteo Salvini, Italy’s internal minister and the head of the Lega party, to forge a populist alliance on the European political scene. The objective to set up an "anti-Macron" bloc was specifically mentioned after the meeting. As a response, the French government said that in the future it would no longer be willing to pay EU transfers to member states that disregard the basic values of the EU, specifically mentioning Hungary and Poland. Meanwhile, the European Parliament approved a condemning report on Hungary, calling the European Council to start an Article 7 procedure against the country. The next key event to watch on this subject will be an informal gathering of the European Council on September 20.
In domestic politics, Fidesz is now aiming to further tighten its grip on the local media. One of its plans appears to be the consolidation of its recently acquired media holdings in the hands of private individuals who are members of the governing party’s political family. Another idea is to set up a new professional organization for journalists, with the likely aim of granting advantages to members and setting disadvantages for those who stay away. Meanwhile, the spectacular disintegration of opposition parties has continued: most lately, the remaining co-head of the centrist-green LMP stepped down, throwing the party into an even deeper crisis than before.
Q2 GDP came out stronger in its second estimate than in the first release, essentially because of a recovery in agriculture and inventory accumulation. The overall decelerating trend is still there but the slowdown is taking place at a rather modest pace. Growth in industrial output slowed down considerably, services, household consumption fixed investment decelerated moderately, whereas construction output continued its unusually high-speed expansion. July retail sales also signified some weakening, which was no surprise in view of the marked deceleration of real wage growth in Q2.
A further piece of recent data that hinted at a cooling economy has been the general government’s net financing requirement in H1 2018. Although the annualized ratio to GDP was lower than the fiscal deficit target set for 2018, it needs to be remembered that this figure is not seasonally adjusted. In effect, the data meant that in H2 2018, the general government deficit will have to be limited to hardly more than half of the actual reported for H2 2017 if the annual deficit target is to be adhered to. As a result, the fiscal impulse will likely weaken in H2 and in early 2019. One sign that the government is actually saving up on expenditure has been the most recent measure to cut the maximum of advance payments under EU-sponsored development programs.
Nonetheless, another news item that points in exactly the opposite direction has been Audi’s recent announcement that it is now starting the long-awaited production of its Q3 model in Győr, north-western Hungary. Q3s are produced in a newly built factory, which is sizable enough to give a material boost to industrial output and even GDP. However, it is difficult to quantify the impact at this moment, as Audi has never disclosed exact details of its local production plan.
Defying expectations of analysts and the MNB, CPI-inflation failed to edge down from its five-and-a-half-year peak in August on the back of moderately stronger non-fuel inflation than a year ago. We expect a further rise in the year-on-year headline rate in September, partly due to higher excise taxes on tobacco products. More importantly, producer price inflation is becoming increasingly nasty, mainly driven by construction and foreign trade prices. Although we do not expect any higher CPI-inflation than currently for the rest of this year, the risk is high that cost-push knock-ons and rising inflationary expectations may push the headline rate further up next year.
Central bank policy went through a rather uneventful month, a real summer break, in August. Interest rates remained unchanged and the MNB continued its long-term programs to buy mortgage bonds and to offer long-term interest-rate swaps. Nonetheless, one interesting aspect was that the MNB again kept the stock of its FX swaps unchanged, in a month when total deposits placed with it by banks fell substantially. Including this move, the Bank removed a significant amount of excess liquidity in January-August, technically preparing the ground for a more efficient use of the sterilization rate or an eventual switch from a sterilization rate to a credit rate, if it eventually comes to that.
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