Investors are banking on a positive new chapter for Hungary as incoming Prime Minister Peter Magyar insists there is no time to waste following his resounding defeat of Viktor Orban – provided he can stick to his plans.
Magyar’s landslide win gives his centre-right Tisza party the chance to change the judicial, electoral, public tendering and media control laws that were at the heart of Orban’s fractious relationship with Brussels and led to around 18 billion euros ($21.2 billion) of EU funding being withheld.
During a marathon post-victory press conference, Magyar, who wants to use the money to boost the economy, pledged to carry out sweeping reforms, join the European Public Prosecutor’s Office, set a two-term limit for prime ministers and unblock a 90 billion euro EU loan for Ukraine.
For economists, the implications are obvious – the unfreezing of EU funds alone, which amount to some 8% of Hungary’s annual gross domestic product, could add 1-1.5 percentage points to its growth, Morgan Stanley estimates.
For international investors, who can pick and choose where they put their money, that and the broader change in mood music would be a significant lift.
“It’s a new chapter for Hungary and it’s a great opportunity,” PGIM’s head of emerging market macro research, Magdalena Polan, said about the change of government.
“To move the economy will not take much because sentiment and rule of law are such an important part of the economic set of factors that impact growth.”
Analysts at JPMorgan expect a reset in relations with the EU to take place almost immediately and say early commitments to reform are likely to be enough to start unlocking the frozen EU money.
EU Commission President Ursula von der Leyen hailed Magyar’s win as “a victory for fundamental freedoms”, comparing the ousting of nationalist Orban to Hungary’s 1956 anti-Soviet uprising and its 1989 break with communism.
Although the mid-year deadline for Budapest to absorb the EU’s post-COVID Recovery and Resilience Facility (RRF) funds looks too tight on the face of it, JPMorgan also believes the “extraordinary circumstances will call for exceptional flexibility” from the EU.
SKELETONS IN THE COFFERS
The election result sent Hungary’s forint surging to its best level against the euro in four years, while 10-year Hungarian government borrowing costs fell by half a percentage point to their lowest since 2024, and the stock market gained almost 5%.
Once the initial excitement settles, though, investors will want to see what Tisza says about state finances after they have had a proper look at the books.
Hungary currently has one of the EU’s largest budget deficits at over 5% of GDP. Its debt-to-GDP ratio is above 70% and rising, and credit rating agency S&P Global has the country just one downgrade away from ‘junk’ status.
Magyar has said he hopes stronger growth and an improvement in sentiment that lowers the government’s borrowing costs further will help the situation. He also vowed to stamp out corruption, end “prestige” investment projects and halt overpriced public procurement.
“I’m sure they will find some skeletons,” Aberdeen EM debt portfolio manager Viktor Szabo said, referring to Tisza’s audit of the finances, although he also expects S&P to stabilise Hungary’s credit rating given the likely unfreezing of EU funds.
The other key to-dos on the new government’s list will be a credible medium-term budget plan, Szabo said. One needs to be presented to the European Commission by October, but an outline of the plan and some ad-hoc measures might be required well before then.
NEW BEGINNINGS, OLD REALITIES
Euro adoption is also on the agenda, even if still years away.
It was a key pledge of Magyar’s election campaign and Tisza’s supermajority should allow it to push through all the required constitutional changes.
Still, Deutsche Bank analysts say the country’s “fiscal and debt dynamics remain incompatible with Maastricht criteria at the moment,” given a euro zone entry requirement to have a sub 3% of GDP budget deficit and debt-to-GDP level of 60% or lower, or at least reducing towards it.
Hungary’s 3% (+/-1pps) inflation target also needs to be brought in line with the ‘close-but-below’ 2% preferred level of the European Central Bank, they said.
PGIM’s Polan also sees some broader economic and political realities remaining in place.
A sudden disbursal of EU funding before reforms are cemented could leave Brussels open to legal challenges from other potentially unhappy member countries.
Hungarian companies, meanwhile, are running into a labour shortage made worse by an aging population, language barriers and its approach to immigration. Living standard improvements haven’t kept up with some of its neighbours either, and ending reliance on Russian gas looks even harder for now given the Middle East conflict.
Nevertheless, the departure of Orban means much is about to change, and most likely for the better for many investors.
“We are in a completely new situation here,” Polan said.
($1 = 0.8491 euros)
(Reporting by Marc Jones)
