It is time for a weaker forint in H2
The preliminary Q2 GDP data reflected some deceleration on unadjusted basis, but only very little, and even that was almost fully cancelled out by calendar and seasonal adjustments. Thus, GDP once again beat everyone’s expectation and showed in fact the strongest yoy growth rate in Europe. The little deceleration came from industry, construction and household consumption, in view of the weaker dynamics of exports, fixed investment and real wages. The prospect for H2 still is a considerable slowdown, due to international factors and tight fiscal policy.
The progressive decrease of the unemployment rate accelerated probably on seasonal grounds most recently, as employment usually picks up in agriculture and tourism at the outset of summer. Excluding that seasonality effect, the trend is still one of a rapidly tightening labor market. To alleviate this situation, the economy will likely require significantly more cooling than so far. However, one positive sign is an accelerating rise by labor productivity in the industrial sector, probably as a result of increased technology investments as labor is becoming ever more expensive.
Moving forward within the year, the government’s intention to achieve substantial improvements in fiscal data in 2019 is becoming increasingly evident. In July, a small cash surplus was reported for the central government, leading to the lowest cumulative deficit recorded for the first seven months over the last five years. Cash expenditure stagnated in nominal terms in H1, whereas revenue rose faster than nominal GDP. The debt ratio is decreasing more steeply than before, and central government deposits have risen lately.
An update is given here on EU development transfers, as regards the amounts used up and still remaining available, disbursements, project completion and reimbursements by the EU. By now, essentially Hungary’s whole quota under the current EU budget has been committed to specific projects. At current speed, disbursements and project implementation would be completed by end-2020 and by late 2021, respectively. A new threat to reimbursements is an unfriendly no-deal Brexit, in which case the UK’s contribution could be lost even before the end of the EU’ s current budget term.
The ÁKK keeps selling big amounts of the new MÁP+ retail bond, imposing no limit on the amounts offered at weekly auctions. Demand has been decreasing lately but is still sizeable. The new retail bonds are essentially used to replace FX-denominated debt, of which no new issuance has taken place so far this year. The stock of government debt sold to the market has been kept unchanged recently, but the share of bonds has increased, whereas treasury bills have been withdrawn in net terms. Apparently, the issuer intends to reduce liquidity and currency risks further.
The BOP exhibited little change in April-May, compared to Q1. The current account and net capital transfers reflected a further small deterioration, but errors and omissions improved somewhat, and so the net financing deficit decreased slightly. In principle, this result can be reconciled with a slowly decelerating economy. But as the data is still preliminary and the changes are not very big, we would hold judgement until final and more detailed numbers become available.
The July CPI data has put the MNB in a comfortable position, as adjusted core inflation dropped to markedly below their standing Q3 forecast. However, falling inflation in July was helped by the relatively strong forint in the June-July period, which in turn could become detrimental to competitiveness, possibly causing a disruption to growth, instead of a moderate slowdown that would be optimal for central bank policy. In the rest of 2019, we expect the MNB to indirectly support a weaker forint, to take into account a part of the inflationary differential between Hungary and the Euro Area.
In more specific terms of MNB policy, this should mean no interest rate measures for the rest of this year, combined with a policy on FX swaps that works both ways, through net withdrawals or net additions, whichever is felt necessary at any given time. In addition, indirect verbal intervention is likely to be actively used. This is already happening, as the MNB carried out a net addition to FX swaps and banking sector liquidity in early August, following a rather relaxed statement issued after the late-June rate-setting meeting. Both of the latter worked towards a moderate weakening of the forint.
Importantly, this kind of more tactical activity on the FX swaps also appears well justified by a recent marked slowdown of monetary growth. The monetary base actually fell in yoy terms by June, and the banking sector’s HUF deposits fell to a record low in July. All this has had little impact on money market rates, due to the existence of the unsterilized liquidity buffer. But the latter has fallen to relatively low levels, and so its short-term variations could lead to unwanted volatility of BUBOR rates in the lack of timely quantitative interventions by the central bank.
Local government elections are scheduled for October 13. For now, the campaign does not appear to be particularly heated. Fidesz seems to be relying on its excellent showing in opinion polls, aiming to hold together and strengthen its existing support base, without any material concession in terms of policy tightness. The opposition has achieved considerable success in forging a comprehensive election alliance, while it is carefully avoiding deeper policy discussion, which could make its existing differences visible. The real stake remains if the opposition can win against Fidesz in major cities, mainly in Budapest.
European diplomacy appears to be enjoying its summer break. Using the time, PM Orbán delivered one of his key policy speeches in late July, in which he reiterated his radical euroskeptic line, and named liberalism as Hungary’s main adversary for the years ahead. We do not expect easy times to come for him on the European scene on this basis.
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