Hungary Faces Steep Economic Challenge in 2023

Hungary’s ruling Fidesz party faces probably the toughest year of its 13-year reign at the helm of the country. The economic picture is bleak and the silver lining very slim. The energy crisis engulfing Europe and Hungary, the ongoing stand-off with the EU and consequent freezing of funds, and the impact of the war in Ukraine are the key factors shaping the nation’s economic landscape.

Hungary is teetering on the edge of technical recession, its inflation rate at around 25% is among the highest in the European Union and interest rates are by far the highest in the bloc. These are the economic realities that the government needs to tackle in the new year. The Cabinet of Prime Minister Viktor Orbán built its economic strategy on foundations that are crumbling: reliance on cheap energy, cheap labor and billions in EU money. Prime Minister Viktor Orbán stated last year that 2022 “has probably been the most difficult year in Hungary since the fall of Communism, definitely as far as my memory goes.” This year may turn out worse.

Keeping our heads above water
Experts say that the first half of the year will be dedicated to staying above water by addressing some of the root problems in the country’s economic policy mix. The backdrop will remain unfavorable: high energy prices, rising inflation, uncertainty over the release of EU funds and pressure on the currency will leave little room of manoeuvre. State investments are on hold, unemployment is expected to start rising, while poverty will almost certainly worsen in 2023.
The EU’s attitude toward Hungary will remain a key factor shaping thew economic landscape in 2023. Economists expect that EU funds will not come seamlessly; there will be political disputes, rule of law, gender issues to smooth over. Nevertheless, the the question remains whether Brussels has the will and the way to keep a close eye on Hungary.
Energy prices and diversification will remain high ont he agenda in 2023. Hungary will need to address the issue of its reliance on Russian energy and look for substantial alternative sources of energy supply.

The positive take
Those in the positive camp argue that there are supportive developments ont he economic front. The massive fiscal tightening launched by the government in 2022 will help curb the budget deficit. OTP Research analyst Gergely Rezessy and chief economist Gergely Tardos noted in early January that, “the 6.1% deficit target for 2022 is easily within reach, even with a sizeable deficit in Q4.”
Falling international energy prices and the “partnership agreement” with EU allowing for conditional access to EU funding signed in late December will also have a positive impact on the economic outlook. The latter triggered a significant forint strengthening against both the euro and the US dollar in early January. These gain will help limit balance of trade and current account deficits and also help curb inflation. A successful international bond issuance will help wqith the financing of the budget deficit. The Debt Management Agency sold bonds worth USD 4.25 billion in the first week of January and Finance Minister Mihály Varga said the issue was three times over-subscribed, showing that investor confidence “is still strong” in the Hungarian economy.
Taking both the positive and gloomy views into account, 2023 will be a test year for Orbán. Economics aside, the key question is whether Hungary will start converging toward the EU or whether the country will spiral out further towards the periphery of the EU.