MNI INTERVIEW: Hungary To Dodge Debt Downgrade-Ex-NBH Official

Hungary will avoid a ratings agency downgrade despite public spending ahead of next April’s general election, a former senior Hungarian National Bank official told MNI, adding that government measures also risked fuelling inflation.

 “The government is attempting to perform a tightrope walk between trying to win the general election and not triggering a possible currency crisis. But it appears they will do whatever it takes with the fiscal space they have remaining.” Istvan Konya said in an interview, noting that in 2022, when the government put cash in voters’ pockets ahead of a national poll, the result was inflation six months later. (See MNI EM NBH WATCH: Sticky Price Growth Reinforces Policy Hold)

The chances of a debt downgrade have also increased after fiscal deficit projections for 2025 and 2026 rose to 5% of GDP, with Moody’s reporting on Nov 28 and Fitch on Dec 5.

But Konya, who was head of research when he left the NBH after a decade in 2014, said there is “always something the government can tweak, some sort of short-term fix – such as raising the bank tax, for example – they can do to avoid a downgrade. 

“They will probably be able to avoid the most unpleasant outcome. What that says about the transparency of their relationships with the ratings agencies or financial markets is something else, but there will be a technical fix.”

DELAYED INFLATION

Measures sold as temporary, such as the 2012 bank tax and the price margin cap on key items introduced last March, store up inflationary pressures, he said. 

“The central bank has said [margin caps] lower inflation in the near term, but that they also lead to significant corporate repricings outside their scope. The first part of that is a simple statistical statement, a matter of accounting. The second is the substantive part, the part on which I think they place greater weight, and which will ultimately make their job harder.”

The government’s announcement of a USD 20 billion swap line with the U.S. should be treated with caution, said Konya, now professor of economics at Corvinus University Budapest. (See MNI INTERVIEW: US-Hungary Swap Deal Sign Limits Will Be Tested)

“The swap line is an interesting issue – if it exists – and we’ll see how that goes. Of course we need dollars for some things, but mostly we need euros, so I’m not sure how effective it would ever be. Or at least it would require a pretty big change in economic policy for it to be,” he said.

“It suggests that we are actually in a pretty difficult position. It’s the kind of thing you announce when you fear that something is coming," said Konya, expressing similar scepticism about the claim that Hungary will be permanently exempt from U.S. sanctions for buying Russian gas and oil.

“We don't know how long the exemption from sanctions on buying Russian oil and gas will last. It might only last until April. The Americans said it's one year repeatedly, which our foreign minister denies. But with Trump you don't plan for the long term – you take your win today, and then whatever happens, happens.”

LOW GROWTH

Hungary’s economy is unlikely to rebound soon, Konya said, with uncertainty encouraging household saving and sapping investment.

“Wages are growing, but firms will not be able to reduce their profit margins much more to accommodate them, since they are not backed up by productivity increases.”

Should opposition party Tisza win in the spring, they are likely to face fiscal traps set by the incumbents,  with some recent giveaways - such as an extra month’s pension payment - deferred to next year’s balance sheet, as well as other probable “skeletons in the closet,” Konya said.

“EU funds would definitely help - it's potentially a lot of money - and I think that's basically the main plan of the leading opposition party: to use EU funding and to sail through the next few months, when they have to adjust economic policy, but without upsetting the electorate. 

“The good news for them – if they win, and polls are still close - is that we no longer hold local elections in the autumn after the general election, which will give them time to make some hard choices.”