Monetary policy done by the Treasury once again
Detailed GDP data for Q1 revealed that the unchanged strength of growth, amidst the relative weakness of the European economy, came to a great extent from an extraordinarily robust performance by the construction sector. Here, the coincidence of massive infrastructural, industrial, office and residential development was primarily at play, in addition to a weather-related base effect occurring in March. An important further supporting factor was a spectacular recovery of the manufacturing sector, led by the auto industry and its domestic supply chain.
There is absolutely no change in the overall negative tendency of the domestic labor market. The available free labor force, including the unemployed and the participants of social employment programs, continues to shrink in a straight line. This means that the strong upward pressure on wages remains as well, with annual nominal wage growth firmly in the low double-digit area.
The central government’s cash budget was essentially balanced in the first four months, and the debt ratio fell markedly. Excluding EU transfers, the budget situation was quite the same, but its improvement from last year appeared much smaller. Surprisingly, the Finance Ministry came forward with a smaller fiscal deficit target for 2020 than the one aimed at by the late-April update of the government’s convergence program. We attribute this change to the outcome of the European Parliament election, which may have persuaded government leaders that EU calls to run tighter fiscal policy are better to be taken seriously.
The ÁKK started to sell MÁP+, its new HUF-denominated, fixed-coupon, 5-year retail bond on June 3, somewhat earlier than initially expected. The new instrument can be bought by domestic and nonresident (!) individuals alike. They want to sell large amounts of the new bond over the next few years, for now, in weekly issues of HUF100bn or higher. The aim is to replace FX-denominated debt progressively as the latter matures, and to seriously reduce the sales of debt to institutional investors. In addition, the new instrument is also passing on inflation risk to the investor, contrary to the ÁKK’s somewhat lower-yielding but inflation-indexed 5-year retail bond. The sales of MÁP+ went spectacularly well in the first two weeks following its debut.
The Q1 balance of payments data look quite poor overall. Although the current account balance was marginally positive and net capital transfers from the EU remained significant, the errors and omissions deficit rose sharply and hence the net financing requirement jumped as well. Comparing BOP and national accounts data, we find it almost certain that a considerable part of the higher errors and omissions deficit originated from the current account, in the form of some over-reporting of net exports for whatever reason.
Following a mixed picture seen in April, which was then explained by a one-month base effect, the rising trend of CPI-inflation returned in May, pushing all relevant indicators exactly or very close to the upper end of the MNB’s tolerance range. Deflators derived from the Q1 national accounts data were even higher than this. In view of these results, we find it virtually certain that the MNB will carry out or announce further tightening steps on June 25, once again in the form of a small increase of the O/N deposit rate and a new FX swaps withdrawal target, set this time for Q3.
In terms of actual MNB activity, the Q2 FX swap withdrawal target was more than met by mid-May, resulting in a substantial decrease of banks’ liquidity, and a higher sterilization ratio. At that point, the front end of the BUBOR curve started to move upwards, and the MNB stopped withdrawing swaps, most probably with a view to waiting for the Monetary Council’s late-June meeting. But in early June, non-sterilized excess liquidity fell sharply again, this time because the initial rally to buy MÁP+ hit bank deposits and money market funds. The latter put more upward pressure on short-end BUBOR rates, yet the MNB has failed to compensate the banking sector by creating new liquidity.
The long-awaited election for the European Parliament in late May has brought about very mixed results for Fidesz. On the one hand, the domestic vote went smoothly, with Fidesz achieving a sweeping victory. But on the other hand, the breakthrough of Eurosceptic parties, on which PM Orbán had placed a very strong bet in his campaign, failed to materialize. The latter left Mr. Orbán in an awkward position, especially with regard to his relations with the European People’s Party, and also to the prospects of the EU financial transfers granted to Hungary. To minimize the damage, Fidesz has announced its wish to stay within the EPP, the postponement of the setting up of a parallel court scheme domestically, and the reduction of the 2020 fiscal deficit target, the latter to get closer to EU recommendations.
Although the domestic opposition was clearly overcome by Fidesz in the European vote, the results of the vote were still quite interesting and noteworthy. First, opinion polls and actual results were not even close enough to say hello to each other. Second, the earlier heavy fragmentation of the opposition side eased a lot, the bulk of votes supporting parties with a proven strong anti-Fidesz commitment. Particularly striking was the rise of a relatively new party of young intellectuals, and the fact that electoral support for radical right-wing parties fell, whereas pro-European forces gained.
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