© . FILE PHOTO: Hungarian Prime Minister Viktor Orban leaves the podium after giving his annual State of the Nation Speech in Budapest, Hungary, Feb. 10, 2019. REUTERS/Bernadett Szabo/File photo by Gergely Szakacs BUDAPEST () – A $5 issue .35 billion by Hungarian Prime Minister Viktor Orban ahead of next week’s election has left a budget gap that could pose problems for those who win as the conflict in Ukraine puts pressure on public finances. With polls predicting the tightest race since his 2010 landslide, Orban has handed out 1.8 trillion forints in tax cuts, tax cuts, pensions and wage increases to bolster his bid for a fourth straight term. That helped push the deficit to 1,585 trillion forints in February, half the target for 2022, and as the war drags on growth, some economists say the government’s budget plans seem outdated. Rising interest rates, soaring inflation and energy prices, and now the cost of helping refugees represent multiple fiscal pressures, compounded by Hungary’s lack of access to EU pandemic recovery funds as a result of a fight over democratic standards. “The room for maneuver has decreased because the budget went through the nose at the beginning of the year,” says ING economist Peter Virovacz. “Whoever forms a government, the number one priority should be to somehow get the budget in order.” Finance Minister Mihaly Varga has already raised the prospect of a budget review after the April 3 vote. While some economists say the European Union could turn a blind eye to high budget deficits within the bloc given the extraordinary circumstances, one risk for Hungary is how credit rating agencies would react to a deficit increase. Fitch said it would be “challenging” to meet this year’s deficit target of 4.9% of gross domestic product, down from 7.3% in 2021 and 8% in 2020, as the pandemic stimulus pushed it up. “The now markedly higher inflation and the near certainty of lower growth in 2022 is likely to have a net negative effect on the budget, so there is a reasonable chance that the target budget deficit will be missed,” said Arvind Ramakrishnan, director of Fitch Ratings. sovereign team. With Hungary’s government debt-to-GDP ratio rising to the highest in Central Europe during the pandemic, based on Eurostat data, a further rise would be negative for ratings. “Any potential impact of current credit developments will depend in part on the government’s fiscal response and the impact on overall debt, as well as compliance with domestic and EU fiscal rules from 2023 onwards,” Ramakrishnan said. In a note before Russia sent troops to Ukraine on Feb. 24, Standard & Poor’s said the stable outlook for Hungary’s creditworthiness reflected expectations that growth would remain solid, supported by EU funds, some of which are currently on hold. “We could downgrade ratings if budget deficits remain high, leading to rising debt-to-GDP ratios, or if Hungary’s external position deteriorates beyond our current expectations,” S&P said. AGAINST WINDS Central Europe has been hit hard by the war in its neighboring country, with currency and stock markets plummeting, creating hurdles such as snappy supply chains and labor shortages. Hungary is one of the central banks that is being forced into major interest rate hikes. By raising key interest rates by 100 basis points on Tuesday, it estimated additional spending from Ukraine’s crisis so far at 0.6% of GDP, which could rise to 1.6% of GDP if the conflict becomes entrenched . Even higher energy and commodity prices would further accelerate inflation and choke economic growth, the central bank warned. “If we called COVID-19 a major shock, requiring unprecedented economic policies, then it applies exponentially with respect to the war,” Raiffeisen economist Zoltan Torok said. A regulatory price freeze to curb household electricity bills, in effect since 2015, could cost up to 1 trillion forints this year, some analysts say, and could become unsustainable. “Besides a significant drop in gas prices, that means spending close to 2% of GDP, plus the added fiscal risk of economic growth falling short of the baseline,” said an economist who declined to be named. They expect a deficit of nearly 7% this year, although rising inflation could soften the blow via tax revenues. After filling a budget of 500 billion forints in dividends during the pandemic, the central bank is now making losses on its cheap corporate financing as interest rates rise. That and higher debt servicing costs could tear another $1 trillion forint hole compared to 2019 levels, Governor Gyorgy Matolcsy wrote in a January op-ed, saying the government will need to find new sources of revenue. . But with Orban promising to continue supporting middle-class families and retirees, some analysts have signaled the risk of a return to the unorthodox fiscal stabilization measures seen after 2010. “The return of similar measures, sectoral taxes and the like cannot be ruled out regardless of who wins the election,” said Torok van Raiffeisen. ($1 = 336.21 forints)
