Even before the elections, the need for a fiscal adjustment in Hungary came up repeatedly. Analysts say the Hungarian government still has room for manoeuvre, but it is questionable how investors will react.
Several analyses show that significant austerity measures are needed for the Hungarian budget. Hungarian Prime Minister Viktor Orbán refuted this at an international press conference last week. The deficit target for 2022 will not be met, Finance Minister Mihály Varga admitted as much before the election. There are several reasons for the budget readjustment.
The economy is growing more slowly than excepted.
Economic growth, which the government had expected, has slowed significantly due to the war between Russia and Ukraine. Instead of a 5 per cent growth, it is now estimated to be around 3 per cent, portfolio.hu reports. The average annual inflation rate could be as high as 8-9 per cent.
Hungary has reached more than 70 per cent of its budget deficit target for 2022 in the first three months of the year.
There are also several initiatives that may be too costly to maintain. One of these is the reduction in overheads. The Hungarian government could react in two ways. Either it adjusts the budget, or it can lower the budget deficit in response to the exceptional situation caused by the war. Adjusting the budget either reduces expenditure or increases revenue.
Read also: Minister: Hungary not to send weapons to Ukraine but will not block EU shipments!
For the Hungarian government, it is important how investors react, i.e. what does the market say? The budget deficit can be a sensitive issue not only for the Hungarian people but also for investors.
The weakening of the forint or EU funds can also be a sensitive point for investors.
The launch of the rule of law procedure is an increasing risk for EU funds. The Fitch rating agency says that “If Hungarian economic policy shifts in a non-investor-friendly direction, it could negatively affect our rating.”
One of the positive aspects recently highlighted by the rating agencies is the strong fiscal discipline in the Hungarian economy. Napi.hu underlines that it will be important to monitor the situation in the energy market, as this sector is more chaotic than ever due to the war, which has quadrupled the world price of natural gas. This is an ongoing extra expense for the government due to the official regulation of residential energy prices.
Source: napi.hu, portfolio.hu