Markets Expect More Predictable Economic Policy

Due to the change in government resulting from last Sunday’s parliamentary elections in Hungary, market expectations suggest that the new government’s economic policy will become more transparent and predictable in the coming years; measures such as special taxes, margin caps and fuel price controls will be phased out over time. That is according to Raiffeisen Bank Hungary’s chief analyst, Zoltán Török.

Regarding the monetary policy of the National Bank of Hungary, Raiffeisen’s chief analyst stated in an interview reviewed by MTI that the central bank will continue to operate on a professional basis, just as it has over the past year. Thus, interest rates will be cut only if justified by monetary considerations, primarily based on inflation indicators. Zoltán Török emphasized that serious cooperation between the government and the central bank is necessary to achieve the inflation target.

However, he also pointed out that due to the phasing out of price controls and the return to market-based pricing, “there will be turbulence in inflation trends.”

Zoltán Török described the public finance deficit of HUF 3,420 billion for the first three months – which amounts to 81% of the annual plan – as “brutally high.” He added that, moreover, this figure represents the annual plan based on the government’s economic policy forecast from last year, while economic growth is expected to remain “very weak” this year as well. The budget law projects 4.1% for this year, while market and central bank forecasts already show figures below 2%, he noted.

He also pointed out that due to the war in Iran, there is a great deal of uncertainty in all forecasts. What is certain is that GDP will once again fall short of projections, meaning that GDP-related indicators – the deficit and public debt – will all worsen. The new government must address this, especially since it inherits a promise from the outgoing Orbán cabinet that the general government deficit would be 5% of GDP this year, Zoltán Török explained.

For all these reasons, Raiffeisen’s chief analyst believes the budget will be a major challenge for the new government.

He noted that, moreover, the incoming government has a promise to fulfill: that by 2030, the country should meet the Maastricht criteria necessary for adopting the euro, meaning “they need to start working hard.”

Zoltán Török also added that this year’s budget is not yet the responsibility of the Tisza Party winning the elections; investors, credit rating agencies and everyone else are aware of this. Their responsibility as a government will begin with the 2027 budget.

What is certain, however, is that EU funds could help keep the budget under control, so these EU funds, frozen as a result of the outgoing government’s policies, must be released quickly, which the analyst believes is feasible.

Regarding EU funds, he noted that there are cohesion funds where the money was previously blocked. There, the situation is not as urgent because there is a seven-year timeframe, although some of that time has already passed, so, roughly EUR two billion have been permanently lost. Although the seven-year budget cycle itself expires in 2027, there is some movement there, partly due to the n+2 rule. With the reconstruction funds, however, the deadline is very short; they need to be released quickly, but according to the analyst, there is a possibility for that as well. The third is the SAFE program, where “the ball is in Brussels’ court” as the outgoing government submitted the Hungarian application.

Raiffeisen’s chief analyst believes that these EU funds can be channeled into the budget relatively quickly and will certainly help with fiscal consolidation this year and in the coming years.

When asked how well-prepared programs eligible for funding are, Zoltán Török said he believes there will be some flexibility on the part of the EU. On the one hand, the Hungarian government has already implemented programs that could have been designated as Recovery and Resilience Facility (RFF) programs; he cited solar energy programs as an example, on which HUF hundreds of billions have been spent.

It may be possible to retroactively classify those programs – or at least some of them – for this purpose. Another possible solution is for the Hungarian government to establish a development company, “channel the money into it” and spend it later.

Zoltán Török also noted that markets are constantly pricing in the future. In recent weeks, they have priced in the election results; they did not expect Fidesz to secure a two-thirds majority, but they did price in its victory.

Commenting on the events of the day following the election, he noted that the Hungarian currency, the forint had strengthened to a multi-year high, yields on the government bond market had fallen, and the stock market had risen to historic highs, all of this occurred despite a very unfavorable external environment. “So, a very, very significant portion of the markets is pricing in the positive scenario that has unfolded and may unfold in the coming months and years,” Raiffeisen’s chief analyst said.