Taxes Down, Wages Up Sharply
Given improved financial fundamentals, Hungary is well positioned for market volatility from the unpredictability of the upcoming US administration. Furthermore, PM Orbán was one of the few government heads expressing support for Donald Trump before the vote, potentially earning some goodwill for the next few years. But even so, Hungary may be forced to spend more on defense in the future. Of course, any potential negative global impact, or rift between the US and the EU, would have an adverse effect on Hungary, too.
GDP growth slowed down again, due to weak industrial output in Q3, reinforcing our worries about the forint’s current strength and decreasing sales prices. Retail sales growth is holding up well, due to robust expansion of wages and employment. Construction output is still falling but has started to consolidate, due to a recovery of EU funds distribution. Merchandise exports keep growing quite rapidly, maintaining a massive external income surplus.
CPI-inflation rose further in October as expected, getting further away from its previous near-zero level, which held until August. This took place on a recovery of fuel prices, whereas core inflation remained largely unchanged at 1.4-1.8%. However, surging housing prices suggest that inflation would look much higher if measured in cost-of-living, rather than in CPI terms.
The central government’s cash budget reached a small surplus in January-October, due to healthy tax revenue, contained spending and a recovery of transfer reimbursements from the EU. In response, the Economy Ministry announced an at least 0.5% of GDP extra spending package for late 2016. ÁKK said the government might issue a euro bond in 2017, to establish a new benchmark following the recent credit upgrades. Moody’s raised Hungary back to an investment grade Baa3/Stable rating on LT FX sovereign debt.
An ambitious, apparently politically motivated, government program to cut social security contributions and boost wages was announced in early November. Despite an additional sharp cut in the corporate tax rate, this program seems only moderately negative for the budget in terms of the immediate tax effects, but highly detrimental for employment, investment and growth in the SME sector, producing a serious threat to the macro outlook.
Inflation is now higher than the base rate. But as a long election campaign is starting, the MNB is likely to leave the base rate untouched until mid-2018, implementing monetary policy through quantitative tools and the interest rate corridor. This has been confirmed by an interview with Governor Matolcsy. In October, de-sterilization by the MNB went ahead full steam, yet FX reserves rose, due to inflows into government bonds and accelerated EU reimbursements.
Fidesz suffered its second defeat in a short while, as parliament failed to support the amendment of the Constitution. A fierce political fight is developing between Fidesz and the radical right Jobbik, the latter being reinforced by the opposition media, partly owned by Fidesz’ recently expelled former allies. A key issue for Fidesz’ future may be high-level corruption, but this may be countered by the government’s labor market and tax package, which could become the top theme for the 2018 election. Fidesz still conveniently leads the polls, yet it is markedly weaker than in 2014, the latest election year.
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