Puzzle of the month: Is Hungary exempt and protected?
Energy remains a key policy concern. On one hand, gas and oil import prices have fallen non-seasonally in recent weeks, generating a substantial terms-of-trade gain and invaluable support for the balance of payments. On the other hand, new US sanctions against leading Russian energy companies and the limited nature of an exemption from those granted to Hungary have made diversification away from Russian oil quite urgent, much the same way as the RePowerEU program has done on the European side, the latter for gas and oil alike. The situation is further complicated by a severe fire at MOL’s only domestic refinery in late October, which will most probably imply the loss of close to half of refining capacity for several months.
Q3 GDP data showed no growth at all in that period, and only marginal expansion on year-on-year basis. Data for September show the continuation of the long-time weak trend in industry and a roughly unchanged speed of consumer demand growth. Employment fell in Q3, reinforcing the negative demand impact of decelerating wage growth. Decreasing employment was a clear break with the growing tendency seen in each of the previous four years. It reflected the dramatic slowdown of profit growth in 2024 and this year, and it also represented a return to Hungary’s long-term trend of moderate productivity increases.
A few days ago, Economy Minister Nagy announced another increase in the fiscal deficit and debt ratio targets both for this year and for 2026. According to the new plan, neither of these ratios would change from the end-2024 actual level, which represents a significant upward revision for 2025 and an even bigger one for 2026, as regards the deficit ratio. The official explanation is that the revision is due to the lower-than-planned GDP growth in 2025, but the changes announced for next year obviously have a lot to do with some new, unbudgeted campaign spending, such as additional payments to pensioners and tax cuts granted to entrepreneurs.
The new fiscal plans are in conflict with the principles Mr. Nagy announced in early September, following talks with rating agencies. Government speakers are asserting that they do not expect negative rating actions in response, but the announcement came right after PM Orbán’s early-November visit in Washington DC, and subsequent top-level references to a new financial "protective shield", which the Hungarian side said it managed to secure from the US government. Unfortunately, nothing specific is known as to the nature of this facility, except Mr. Orbán’s media statement that it will make it impossible to efficiently attack the forint on the currency market. The US government has not confirmed the existence of any such commitment on its side. Responding to questions from the media, Mr. Orbán’s Cabinet Minister said most recently that this was only a "theoretical possibility" for the moment, some sort of financial assistance, which the US government has "guaranteed" to Hungary in case of a potential financial distress.
Even though imports are growing faster than exports in volume terms, the increasingly substantial terms of trade gains Hungary enjoys on energy and other products have kept the current account, net external financing and the basic balance in equilibrium so far in 2025. On the domestic side, monthly CPI-inflation has been reported at zero percent for the third consecutive month in October, which kept the year-on-year rate unchanged, moderately above the medium-term target range, for the last four months. However, given the existence of the recently extended administrative price controls, a substantial amount of additional inflationary pressure exists, fueled by robust consumer demand and the extreme speed of housing price inflation. Analysts expect inflation to decrease into the target range by end-2025 temporarily, followed by a return to roughly the current level by H2 2026.
The EURHUF exchange rate has become rather counter-inflationary by now, yet analysts do not expect any base rate reduction between now and the election. Reasons for this include the recent contrary indications from the MNB, forecasts that inflation will likely rise again during 2026, the threat that price controls may be fully or partially lifted after the election, and all sorts of energy-related uncertainties, including the potential costs of the recent refinery fire and of the increasingly probable diversification of gas and oil imports. Importantly, the government is apparently no longer pushing for a lower base rate or a weaker forint. One new reason for that may be that a genuinely strong forint will be required to achieve the government’s new end-2026 debt ratio target.
The absolute focus of foreign policy events recently was PM Orbán’s early-November visit to the White House. This was generally perceived as a gesture from President Trump to demonstrate his strong support for Mr. Orbán ahead of the election, especially after the failed Trump-Putin meeting, originally planned to take place in Budapest. Indeed, Mr. Orbán did everything he could to give the maximum possible publicity to the event. However, the results have still proven to be somewhat controversial, as Hungary made commitments to buy a lot of various things from the US, but the countervalue was only a limited exemption from anti-Russia sanctions, and possibly a not-too-specific top-level promise of some financial assistance in case of potential future financial distress. The EU side of foreign relations does not look better at all, due to Mr. Orbán’ continued firm resistance to major EU policies, and to Hungary’s dependence on the EU even in the short term, which we explain in more detail in our report.
Finally, the election race has entered a new phase, with Tisza naming its election candidates in the past few days. More accurately, it has named three candidates for each voting constituency, of which registered Tisza followers and then the general public will be allowed to select the eventual nominees, in a two-round primary vote. Meanwhile, the mass theft and illegal publication of Tisza followers’ data has taken place, among currently unclear circumstances and with similarly unclear consequences. The polls have been pretty much stuck with a significant but stagnant Tisza lead in most, but not all of the surveys, whereas it remains unclear who else in addition to Tisza and Fidesz might get into parliament, which may prove to be highly important from the point of view of post-election alliances.
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