The moment of truth is coming
At present, all eyes seem to be focused on the upcoming budget plan for 2027 and the macro roadmap for 2027-2030, all set to become publicly known next week. Investors will likely see a substantial reduction of the deficit target for next year, but they should not expect a miracle in that regard. This is because the government will need to satisfy the needs of euro-convergence and domestic political realities simultaneously, while facing a fundamentally unfavorable set of external conditions. As a result, the size of the intended deficit cutting is likely to converge to the minimum requirement set by the euro-convergence process, investors, the EU Commission and rating agencies. Completion of euro-convergence by 2030, which is a government target, could imply ERM-2 by 2029 and eventual euro-adoption by January 2032, the MNB has said recently.
Following the removal of some key political figures left behind by the Orbán regime, Tisza has made considerable progress in its "Operation Purgatory", an energetic anti-corruption drive to call to account those who stole or misused public funds under the previous government. However, there are obstacles as well, as the new President of the Republic is strictly speaking not Tisza’s man, and there is considerable resistance from some crucially important non-government-controlled institutions.
The foreign policy environment remains supportive. Regarding access to EU funds, RRF reimbursement documents were sent to Brussels, and the EU Commission is proposing to the Council the release of the so-far-blocked cohesion policy funds, as well. After some bumps and temporary conflicts, agreement has been reached with Ukraine, enabling the latter to proceed with EU accession talks further, after a law granting minority rights was approved by the Verkhovna Rada in Kyiv. In theory, President Trump could hit Hungary with penalty tariffs for buying Russian oil, but that seems to be unlikely, as the US itself is currently easing sanctions to facilitate the exports of diesel by Russia.
Higher energy import prices, due to the war in the Middle East in the main, are hitting Hungary to a substantial extent. This impact is certainly short of dramatic, but it needs to be taken into account in BOP, inflation and fiscal forecasts. Other than prices, the energy situation seems stable. Thanks to the hastily constructed riverbed threshold, the Paks nuclear plant is safely up and running, gas inventories are properly filled for winter, gas and oil shipments from Russia keep flowing, while action to diversify away from Russian imports is underway. Importantly, the main unit of MOL’s only domestic refinery has been fixed after a fire one year ago, and is restarting gradually from this month.
Industrial output is growing faster than expected because of the start of production at major new car factories and the runup of the domestic production of IT hardware. Such gains will likely be extended next year, due to the expected entry of further new capacity. However, this year’s GDP growth looks weaker than expected because of climate-related drama in agriculture, a recent setback in construction, and the negative impact of the strong forint on tourism. Growth is expected to accelerate in 2027, driven by industry, the arrival of EU funds, and the lack of another sharp drop in agriculture, which has essentially used up its negative growth potential by now. Consumption growth should decelerate on weaker wage growth, whereas fixed investment, especially in the public sector, will likely be revitalized.
We still see substantial deterioration of the BOP, with the current account, net external financing and the basic balance moving into moderate deficits by 2027. For sure, improving industry, weaker consumption growth, lower debt costs and the appearance of EU funds late this year will help, but more robust fixed investment and rising energy import prices still represent major factors pulling the balances in the negative direction. Following an upswing around and after the election, the errors and omissions gap has failed to show any serious correction in the most recent data.
Inflation has passed the bottom of its cycle already, and is rising again with moderate speed both in terms of consumer and producer prices. This new trend is generally expected to continue until H2 2027, on more expensive energy, potentially rising food prices, and the fallout of the massive disinflationary impact of recent forint appreciation. Important one-offs adding to CPI-inflation will be a November hike of excise taxes on tobacco and, potentially, the partial or full elimination of the existing administrative caps on retail margins. The recent moderate decrease of employment and the ongoing normalization of wage growth should also be disinflationary, but caution is due in this regard, as important aspects of the government’s income policies for 2027 have not yet been clarified.
The MNB’s base-rate-cutting mini-cycle ended, for now, in September. Given the simultaneous reduction of the inflation target, the fact that inflation is higher by HICP than by the national definition, and the fact that the MNB sees rising CPI-inflation until mid-2027, we do not expect any further base rate cuts until June next year. However, should major conditions be largely right at that point, meaning appropriate fiscal tightening, the settling down of global energy inflation, no sharp upward turn in the food price cycle and a reasonable amount of calm in the global bond market and major central banks’ policies, H2 2027 should see further base rate cuts. The MNB continues to keep away from the use of quantitative easing, and this is very likely to remain so until end-2027, as well.
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