UniCredit sees modest growth and fiscal overshoot for Hungary in 2024

By bne IntelliNews April 15, 2024

Hungary’s economic rebound will be modest this year, around 2%, and the return to potential growth is set to be postponed to 2025 with GDP expanding around 3.2%, according to UniCredit bank's quarterly forecast of CEE countries. Fiscal targets will be missed, leading to the possibility of an excess deficit procedure.

Battery manufacturing capacities will partly counterbalance the drop in external demand in 2024, but due to low domestic value added and the import need of these investments, the final GDP effect will be low, it added.

The 2024 growth projection for Hungary is below the 2.6% target for the EU-CEE countries (V4, Bulgaria, Croatia, Slovenia and Romania, but a tad higher than the 3% average forecast in the seven countries for 2025.

UniCredit said fiscal policy is constrained by the sizeable debt service, around 4% of the GDP, with the cost of retail inflation at 1-1.5% of GDP, while energy subsidies are around 1.5% of GDP.

The budget deficit will reach 5.7% of GDP in 2024, 1.2pp higher than the government’s unofficial budget deficit target. A lower deficit would be achieved only if government subsidies making up around 1.5% of GDP are reduced this year, yet it would require a massive primary surplus as debt service costs will exceed 4% of GDP in 2024.

Hungary’s public shortfall will edge lower to 5% of GDP in 2025, 1.3pp above the cabinet’s target. There is a risk of an excessive deficit procedure (EDP) launched by the European Commission, it warned.

UniCredit sees the risk of a wedge between official deficit targets and actual public shortfalls increasing over time

The widening of the budget gap has increased the country’s funding needs significantly this year and Hungary will exceed its original issuance plan by the biggest margin in CEE, according to the report.

The bank lowered its year-end CPI forecast to 5.7% in 2024 and 3.2%  in 2025. It put average annual inflation at 4.5% and 4.4% respectively.

Hungary has reduced interest rates faster than any other CEE country in 2023 as disinflation accelerated, but the pace of rate cuts remains uncertain, with the fading of carry trade and continuous frictions with the government.

The hawkish position of the US Fed will narrow the scope of rate cuts in emerging markets, including Hungary. The MNB may continue rate cuts from 8.25% at present to 6.5% and temporarily halt easing during the summer if inflation momentum picks up anew amid a rebound in domestic demand.

Although a quick adjustment in Hungary’s current account position and a strong FDI pipeline may further improve Hungary’s basic balance in 2024-25, policy risks will likely weigh on the HUF. It also warned of the policy frictions between fiscal and monetary policy until 2025, when the government will likely nominate a new central bank governor.

The sharp decline in positive carry offered by the forint has been triggering capitulation in carry trade positions built up over the last two years. UniCredit projects a weaker forint against the euro by the end of the year, falling from 393 to 402, while its USD/HUF forecast is 356, down from 369 at present.


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