OUTLOOK 2019 Hungary

OUTLOOK 2019 Hungary
By bne IntelliNews December 21, 2018


Prime Minister Viktor Orban firmed his grip on power after the third consecutive supermajority win by his conservative Fidesz party in the April 2018 general election, thanks to a strong economy, a relentless anti-migration campaign and by exploiting Fidesz’ media dominance.

Polls show the opposition is still reeling from the election shock and despite changes of leadership, rival parties have failed to present an alternative to Fidesz.

Civil groups were behind the mass anti-government demonstrations in April, which was also a strong signal to opposition parties. The 2019 local council elections are pivotal for them, especially in Budapest, where support for Fidesz is well below the national average.

Those awaiting a regime change in April pinned their hopes on the former treasurer of Fidesz, Lajos Simicska. Hungary’s most powerful oligarch fell out of favour of the prime minister in 2015 after which his businesses began to decline. However, Simicska failed to drop the “bomb”, a big revelation that would have shaken the illiberal regime created by Orban to its core.

The Hungarian PM, who resorted to threats against his opponents in the campaign, came out as the clear winner in the three-year fight between the two. 

Post election, Simicska closed down his newspaper, further narrowing Hungary’s shrinking media landscape, and sold his entire business empire to his partner, who passed it on to companies owned by Lorinc Meszaros seen as the proxy for the prime minister. 

As 2018 drew to a close, thousands of protesters took to the streets against the so-called “slave law”, under which the period employers may account overtime for the purpose of calculating wages and rest days was from twelve months to three years, and to raise the upper threshold for annual overtime from 250 to 400 hours. 

On the other hand, the electorate has largely shrugged off allegations of corruption against leading politicians from the ruling party, including the family of the prime minister. The EU’s anti-graft agency OLAF discovered an established system of organised fraud in a company formerly co-owned by Orban’s son-in-law, but the Hungarian authorities closed the investigation without pressing charges. 


Reports show that freedom of the press in Hungary worsened in 2018. Government-affiliated owners dominate the media market, and are extending their reach with new acquisitions. In November, a central media holding was set up with a portfolio of nearly 500 outlets, a concentration of the right-wing media overseen by a non-profit organisation with leaders close to the prime minister.

Support for Fidesz remains stubbornly above 40% thanks to the generous family subsidy schemes and the party’s non-stop campaign against migration. The cabinet is in constant campaign mode, stoking fears against migrants, even though the number of illegal border crossings have been minimal.

Orban has also become a focal figure in European politics. Hungarian prime minister is posing as the defender of Christian values in Europe and is personally spearheading the anti-migration coalition. 

Political analysts say the outcome of the European parliamentary elections in May 2019 will be decisive for his political future. He has narrowed the stakes of the election to the fight between anti-immigration forces and pro-immigration liberal elites in Brussels. 

Analysts expect mounting pressures within the European People’s Party to oust Fidesz from its ranks after the European Parliament election, as Orban has crossed several red lines already by cracking down on NGOs, ousting the CEU and undermining judicial independence.

Orban will continue to face pressure from Brussels and Strasbourg on many fronts in 2019. Infringement procedures are underway against Hungary over the “Stop Soros” laws, which criminalise support for illegal immigration, constitutional amendments and changes to the higher education law, which led the university founded by Hungarian-born billionaire George Soros to relocate to Vienna. 

The European Parliament in September 2018 launched the Article 7 procedure against Hungary, citing the “existence of a clear risk of a serious breach of the EU values. This could ultimately strip Hungary of its voting rights, but this would require a unanimous vote by all other member states, a very unlikely scenario. The Sargentini report on which the vote was based sparked a furious rebuke by the government and served as yet another pretext for bashing EU politicians.

For V4 countries including Hungary, the key priority on the European landscape in 2019 will be to fight planned cuts in the cohesion and agricultural funds in the upcoming debates for the next EU budget cycle. 

Budapest staunchly opposes any reduction and even offered to increase its contribution to the budget as the UK leaves the community

According to draft proposals, Hungary is likely to see a drop in cohesion funds from the EU budget after 2021, which will have a major impact on growth.

Hungary, which has been one of the biggest recipients of EU funds, is close to depleting the €30bn it is entitled to during the 2014-2020 period as some 94% of the money had already been earmarked for winning tenders. This will take its toll on capital expenditures. The EC projects gross fixed capital formation to drop from 12.5% in 2018 to 9.4% in 2019 and to 1% in 2020.

The government has made steps to fend off the negative impacts from the decline in EU transfers and prepare the economy for the digital transition, whilst increasing the country's competitive position. 


Hungary's economy has never been in better shape, said the head of Banking Association recently. Economic fundamentals look solid: wages are rising by double-digits, employment is at an all-time high and the construction sector and investments are booming, not least because of the absorption of EU funds. 

Double-digit wage hikes, rising consumer spending, and the EU-funded investment boom are the main drivers of growth. Growth beat analysts’ projections significantly in Q3, rising by a calendar-adjusted 5.2%, the strongest pace since 1996. The government’s official 4.3% growth target for 2018 seems conservative in the wake of recent upgrades by international institutions. 

However, the consensus view of economists is that Hungary’s economy will lose steam in 2019 and 2020. The European Commission forecasts a 4.3% growth for 2018 and 3.4% growth for 2019, while the government is targeting GDP growth above 4% from 2019 until 2021, based on the convergence programme.

The estimates exceed the 3.3% forecast for 2019 and the 2.7% expansion for 2020 by Hungary’s central bank, the Magyar Nemzeti Bank (MNB), led by former economy minister Gyorgy Matolcsy, an economist revered by the prime minister for his bold visions and strategies.

Economic growth in 2018 came hand in hand with fiscal discipline, a surplus in the trade balance and in the balance of payments, a rare occurrence in the last 100 years.

Banks have also played their role in stimulating growth by ratcheting up lending as yields tumbled to record lows. 

The central bank is pressing banks to increase lending further as the sector’s assets and the ratio of outstanding loans to GDP remain relatively low in regional comparison, which is the consequence of a creditless recovery after the crisis. 

Hungarian banks reduced their non-performing loan (NPL) ratios to pre-crisis levels as foreign-currency loans were phased out in previous years.

The Orban cabinet has also made improving Hungary's demographics a strategic focus, as in the long-term this will be the largest impediment to growth. The labour shortage is now reaching critical levels and with the annual decline of 40,000-50,000 in the population it will only become an even bigger problem. 

The government in rhetoric has rejected filling the labour gap with foreign workers but it has scrapped work permits in sectors hardest hit by the labour crunch. There are some 20,000 Ukrainians now working in Hungary, which is only a fraction of the level in Poland, but employers say this is only a partial solution as guest workers leave for the west after a few months. 

Rising trade protectionism and Brexit constitute direct risks for export-oriented economies in the region, including the Slovak Republic and Hungary.


The Government Debt Management Agency (AKK) is to issue its financing plan at the end of 2018 or in early 2019, but the AKK is planning a net foreign currency issuance of €0.9bn in 2019, similar to 2018 levels.

Hungary will also push to reduce the share of foreign currency debt within the country’s total debt further. The share of non-forint debt fell from 60% in 2010 to around 20% in 2018 and is seen falling further in 2019. Monetary policymakers and the government are hoping that these reductions will prompt rating agencies to upgrade the country's debt rating. Hungary's ratings remain one notch above the investment-grade level, unchanged since 2016.

External market conditions remained favourable throughout the year for the MNB to keep the base at 0.9%, a record-low level in place since 2016. The MNB claims that lower debt service costs saved the budget hundreds of billions of forints, supporting the pro-cyclical fiscal policy. 

The MNB remained unfazed in the wake of market turmoil in Turkey in the summer and kept rates on hold when yields peaked for the year and the forint fell to an all time low against the euro. 

The central bank extended its monetary policy instrument with interest rate swaps and the mortgage bond purchase programme launched in late 2017 to push down rates on the longer end of the yield curve. Bond yields reached record lows in January 2018, and the spread between the 10-year Bund and 10-year Hungarian bonds narrowed to a record low. Later in the year, the yield curve steepened as short yields fell into negative territory. 

The MNB has adamantly stuck to its ultra-loose monetary policy throughout, even as inflation began to creep up to new multi-year highs, near its 2-4% tolerance band, driven by higher fuel prices. 

Inflation expectations remained anchored at a low level and demand-driven inflation from the tight labour market has yet to feed into consumer prices.

Market watchers said the bank was fighting for its credibility as it came under pressure to normalise rates. The MNB in September signalled for the first time that it was prepared for a gradual and cautious normalisation of monetary policy. Policymakers were relieved to see inflation buck an eight-month rising trend in November, as the annualised CPI fell to 3.1% from 3.8% in October, a six-year high. The MNB expects full-year inflation of 2.8% in 2018 and reach the 3% level on a sustainable basis in mid-2019

The European Commission sees the average annual inflation increasing from 3% in 2018 to 3.3% in 2019 on the back of higher commodity prices and tobacco duty increases.

The prudent stance of the European Central Bank (ECB) may help the MNB to postpone the first rate hikes well into 2020, analysts projected. The market consensus is that this will be preceded by the unwinding of the unconventional monetary tools later in the second part of 2019.


Economic growth has become more broad-based and less reliant on vehicle manufacturing, though this remains a key sector of the economy.

The state investment agency allocated some HUF100bn in cash grants for companies to invest in Hungary last year and these trends will continue this policy in 2019.

Hungary’s vehicle sector is set to surpass 2017's HUF8.5 trillion (€26.1bn) production value in 2018, as this figure was met in the first eight months of the year. Some 91% of output is exported and the sector accounted for 28.2% of the country's industrial production.

Hungary has become one of the few countries in Europe to host production facilities of all three German premium carmakers after BMW announced a €1bn investment in eastern Hungary in 2018.

The largest ongoing investment in this field is the test track for self-driving cars in Western Hungary, which will be completed in 2019 from a HUF40bn investment.

In another significant development, Jaguar Land Rover (JLR) said it is opening a brand-new engineering centre in Hungary. The facility will open early in 2019 and employ 100 Hungarian engineers. Jaguar has similar facilities only in the UK, Ireland, the US, and China.

In another segment of the high tech industry, state-owned electricity company MVM opened Hungary's biggest solar farm in the northeast of the country in November, following a HUF9bn (€28mn) investment in its first renewable energy project.

MVM Hungarowind, a subsidiary of MVM, made the strategic decision to invest in solar energy with the aim of becoming the largest solar energy producer in Hungary. The company has begun the construction of 110 solar power plants scattered evenly across the country's main regions, which are expected to start commercial operation before the end of 2019. 

Hungary's energy strategy aims to reduce the country's energy dependency, with the prime focus on investing in nuclear and renewable energy projects. The government wants to increase the share of renewable energy sources (RES) within the energy mix, which currently account for 15% of energy production, thanks to the predominance of biomass.

Meanwhile, Hungary is expanding its sole nuclear power plant with two 1,200MW blocks that will double capacity from 2,000MW. However, the project is behind schedule by four to five years, Hungarian media reported recently, though this was denied by the government. Paps accounts for half of Hungary's electricity production and a third of the consumption.

Tourism is also going strong in Hungary, which has seen a couple of record years in terms of visitor numbers. The government declared tourism a strategic industry with the aim of boosting the sector's contribution to GDP from 10% to 16% by 2030.