Alarm Bells Ring as Orban Struggles to Rein in Hungary’s Budget

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(Bloomberg) — Hungarian Prime Minister Viktor Orban’s government is pushing back against growing criticism over fiscal management that investors say may push the recession-hit economy into a negative spiral.

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Finance Minister Mihaly Varga insisted the country’s plans are on course after the European Commission pointed this week to “weaknesses in budget planning and execution” and “ad hoc” spending for making a bad situation worse.

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Hungary “disputes” the assessment, Varga said Thursday, rejecting a recommendation from the European Union’s executive to cut lavish energy subsidies.

“We’re on track to hopefully reduce the budget deficit to below 3%” of gross domestic product next year, he said. “I wouldn’t call this a structural problem.”

The budget has racked up a record shortfall for the first four months of a year, and faith in the government’s ability to deliver on its pledges is waning. Even the Fiscal Council, a government body responsible for advising on public finances, expressed doubt.

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“The achievement of the deficit goal can be considered risky on the whole,” it said in its report to parliament this week.

Hungary has suffered more than any other EU member from Europe’s cost-of-living crisis, as rising food and fuel costs helped drive inflation to a bloc-high of more than 25% earlier this year.

Orban responded by capping food and fuel prices and subsidizing utility bills to shield Hungarians from soaring energy costs. 

While fuel price caps have since been phased out, discretionary spending has undermined fiscal consolidation, including the purchase of Vodafone Plc’s Hungarian business for $1.9 billion, a stake now majority-controlled by a company close to Orban.

Until recently, investors’ attention has been on the central bank’s EU-topping key interest rate which, at 17% after a one percentage-point cut this week, drew in hot money to anchor one of the most volatile currencies globally.

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But the sky-high borrowing costs helped deepen a recession that the government only expects to exit in third quarter. Tax revenue has plunged following a plunge in consumption, while surging debt maintenance costs have caused a spike in expenditure. 

On top of that, the EU has frozen more than €30 billion ($32 billion) in grants and loans over corruption and rule-of-law concerns, adding to the fiscal strain. Earlier this month the government raised its deficit target for 2024 and 2025, just months after abandoning its goal for this year and missing last year’s.

“The extent of fiscal deterioration varies greatly among emerging markets, and Hungary is one of the worse culprits,” said Eimear Daly, a strategist at NatWest Markets. “I do think there is a risk that in the medium term market focus shifts from monetary policy to fiscal policy.”

Now the government may have to resort to further steps to raise revenue, including breaking a pledge to scrap taxes on banking, energy, pharmaceutical, retail and airline firms enacted last year.

The fiscal hole Varga has to plug is in the ballpark of $3 billion, said Viktor Zsiday, a portfolio manager at Hold Asset Management in Budapest.

“Hungary is in a vulnerable position in terms of financing,” he said. “Investors are lured in by high rates, but most of them are close to the exit and could leave at any moment if bad news would hit, for example about the state of the budget.”