A decisive point in the power play between Tisza and Fidesz
The road back to democracy and to the political mainstream of Europe remains bumpy. But with an energetic push in the area of legislative reforms and in foreign diplomacy, Tisza appears to be making real progress in this direction, and with continued massive public support and strong international tailwinds, the continuation of this trend is likely.
Tisza’s parliamentary supermajority has passed another constitutional amendment, to oust President Sulyok and the Constitutional Court’s Fidesz-appointed head, in addition to cancelling the Fiscal Council’s right to veto the government’s budget proposals. Tactically, these measures are aimed to remove the two key means for Fidesz to undermine the Tisza government, essentially ending the temporary dual power created by the April election result.
However, parliament’s decision is not the end of the story. The Constitution grants a major role to the currently Fidesz-controlled Constitutional Court in the impeachment of the president, and also in deciding if the Constitution’s amendment is in in line with the existing rules on that procedure. This opens the path for the president and the Court to question the validity of the amendment, but PM Magyar and Tisza’s parliamentary faction are planning to go through with it anyway, claiming that the president has no real basis for questioning the legality of this procedure. The potential consequences of this conflict are unclear at this moment, but on the whole, Tisza seems to have the upper hand and is likely to pull through eventually.
The European Council has approved Hungary’s amended utilization plan for the RRF funds, definitively fixing the conditions for the country’s access to them. Now, it is entirely up to Hungary to meet the legal conditions and to implement the plan by end-August, for it to get the €10bn from the RRF by end-2026.
The government is also pushing hard to move forward with its anti-corruption efforts. It has handed in to parliament its legislative package to set up the National Asset Recovery and Protection Bureau, an agency to act as a prosecutor in cases related to the theft and negligent waste of public money. Indeed, the legal basis for this institution is created by the new constitutional amendment. In addition, Hungary has now formally become a member of the European Public Prosecutor’s Office, an agency mandated to act as a prosecutor in cases related to the use of EU funds.
The energy situation has greatly improved in recent weeks. Import prices, primarily of crude oil, have normalized, the system of protected retail fuel prices has been cancelled as unnecessary, and the country’s strategic oil reserves have been refilled entirely. However, the most recent events in the Middle East keep up the red flag regarding any forecast on global energy.
Short and medium-term growth prospects look somewhat better than three months ago. Industrial output appears to have recovered in Q2, consumer demand expanded a bit faster than expected, and even agriculture looks better than last year, despite the continued dry weather. For late 2026 and next year, the renewed availability of lots of EU funds is likely to boost fixed investment and improve the overall growth outlook.
The fiscal results look quite bad after the election, but the new government achieved a promisingly large and non-seasonal monthly cash surplus in June. In general, strong emphasis appears to be put on keeping the government’s operational costs low, and on saving up public money wherever possible. So far, only very few of Tisza’s spending promises have been actually delivered, although some further extra spending is likely to come later this year.
Even though the government is planning to publish its budget amendment for this year at end-August, it has already presented, with unusually rich detail and transparency, its forecast regarding the fiscal balance in a no-policy-change scenario for this year and 2027. For this year, the expected deficit is even higher than the final forecast given by the outgoing Fidesz government, although 2027 should look better, as this year’s election-related one-time spending items fall out. However, none of the newly presented data represent targets at this stage. We do not expect much fiscal adjustment over the rest of this year, so the reduction of the deficit is likely to start in 2027.
The fundamental part of the BOP is deteriorating further, although Hungary’s terms of trade appear materially more favorable than we expected three months ago. This year, an exceptionally large errors and omissions deficit appears to be developing, which we assume to be caused mainly by unrecorded capital flight. We expect normalization in this regard again in 2027. However, the financial account looks very good in the post-election era, so far providing massive support to the forint and raising official FX+gold reserves to record high levels.
CPI-inflation surprisingly fell again in June, remaining below the floor of the MNB target range. The Q2 inflation report included a dramatically more favorable forecast for the headline rate than the previous one: it no longer expects inflation to run above the medium-term target at any time over the next two years. All this appears to be due to lower energy prices, the much stronger forint, and the recent favorable development of food prices. However, a warning is due here as well, given the uncertainties about global energy and food prices, and the sustainability of forint strength.
Emboldened by the good news on inflation, the MNB reduced its base rate by 25 bps in June, and Governor Varga essentially promised two other cuts of similar size for the next two months, unless a significant negative change takes place in circumstances. Then in September, presumably knowing much more about the government’s fiscal and income policy plans, the MNB is planning to reconsider the possibility of further easing. We expect further rate cuts only in 2027, due to likely caution justified by the MNB’s wish to keep the forint strong at all times.
Meanwhile, some of the administrative measures that had been distorting prices have been removed. These include protected fuel prices, the previous government’s self-restraint agreements with banks, telecom and retail trade service providers, and the subsidized low-interest-rate on bank loans granted to SMEs. These changes should improve the efficiency of MNB policy, and are also required for the purposes of euro convergence, which the government aims to achieve by 2030, as has been formally announced in recent weeks. However, the caps on retail margins will remain in place in short term, and the price caps on fuels may be reintroduced if needed, both for political reasons.
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