Domestic politics suddenly come into motion
We have mostly good news on the energy situation. January, the outstanding peak of the heating season, was once again warmer than average, although not quite as warm as one year earlier. Domestic gas reserves are almost at their historic maximum for this time of the year, and European gas prices have fallen back to pre-war levels. Hungary’s pipeline gas connection to the Adriatic is being expanded, which may become crucial if Russia’s export capacity is reduced by war events. However, Urals crude oil prices have stabilized at an elevated level. In general, the combination of relatively low gas prices and expensive oil imports is good for the government budget but bad for inflation.
GDP growth came to a halt in Q4, which was received with widespread disappointment given the material pickup in the previous quarter. Analysts typically blamed this on weak demand for exports, mainly from German industry, whereas the government remained worried mainly about the delayed recovery of domestic consumption. Both views seem to be largely correct, and yet a deeper look at the picture appears to be more nuanced. The recovery of retail sales actually started in late 2023, and the decrease of industrial output had been decelerating during the year, because of the stabilization of domestic demand. The situation in construction looks more negative, as it has been hit by fiscal adjustment, the relative scarcity of EU funds and the progressively weakening housing market.
The current account balance went through a negative correction in December because of the weakness of merchandise exports. However, this came after two really good months, so that the current account was still balanced in Q4. Net FDI inflows picked up simultaneously, leading to a moderate basic balance surplus. For 2023 as a whole, the BOP nearly returned to full balance, thanks to a massive improvement in merchandise trade. In January, the ÁKK essentially met its annual FX borrowing target, raising official FX reserves to an unprecedented high.
The fiscal deficit targets for this year and 2025 have been raised substantially, pretty much along the lines we predicted in our January forecast. This decision was taken soon after PM Orbán failed to achieve the full release of EU development funds at the European Council’s meeting in early February. It was also confirmed that the debt ratio remained unchanged in 2023, despite the original plan to reduce it markedly. In January, the central government recorded a small surplus, helped by incoming EU transfers. Over the last two months, the EU Commission essentially paid out everything that had been due and approved on the basis of the outgoing budget and the partial unblocking of new funds in mid-December.
January brought about a larger-than-expected decrease of headline CPI-inflation, which had a lot to do with the delayed response by fuel prices to a major excise tax increase at the outset of this year. However, the expectation that inflation may actually rise moderately over the rest of 2024 appears to be increasingly widespread. We present evidence that indeed important factors point in this direction, including the likely catch-up of fuel prices in the coming months, the recovery of consumer demand, the beginning of the stabilization of producer and import prices, the weakening of the forint, and wage developments.
Despite inflation’s significant upward potential from its current low, pressure from the government on the MNB to accelerate the pace of monetary easing will probably intensify in view of the momentarily existing high real positivity of the Bank’s base rate. Indeed, the Economy Ministry has come forward with new ways to generate cheap credit in the banking system and through the government’s own development finance institution, which has only raised the risks associated with an overly optimistic conduct of central bank policy. Given these conditions, the Monetary Council is likely to reduce the base rate at its now standard 75bps monthly pace at its next meeting on February 27.
At the European Council’s extraordinary meeting on February 1, PM Orbán withdrew his veto of a €50bn financial aid package to Ukraine, sorting out a sharp conflict between Hungary and the rest of the EU. This was done under the threat of the government’s voting right being suspended, and of the actual payment of the EU funds unblocked in December being halted. The government did not achieve the release of any further development funds from the EU, and it did not manage to get an annually recurring veto opportunity on the use of the EU’s Ukrainian facility. However, it managed to greatly ease the intense western pressure on its diplomacy. Another conflict of a similar kind, Hungary’s reluctance to ratify Sweden’s NATO accession, sharpened in late January, after Turkey approved Swedish membership, leaving Hungary as the last member country to do so. This was followed by some angry high-level messages between Sweden and Hungary for a few weeks. But there may be a happy ending on this subject, as Sweden’s prime minister has agreed to come to Budapest later this week, and Fidesz’s parliamentary faction has announced its support of the ratification decision at last. Just as for Turkey, a major arms deal is rumored to be an important motive on both sides.
After a long period of almost complete standstill, domestic politics suddenly came into motion, after an accidentally revealed presidential pardon of a convicted pedophile-helper. In about two weeks, this led to the resignation of three core figures of Fidesz, mainly because of PM Orbán’s swift reaction to the matter, with a view to avoiding more serious consequences. This case is unlikely to have any impact on financial assets, and it will have probably a limited effect on this year’s election chances. However, it may have longer-term consequences on domestic politics, not least due to two follow-up events: a highly positioned Fidesz member decided to talk harshly against his party in public, and the regime’s so far biggest street demonstration was held for the protection of children, launched by a non-party civil initiative.
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