EM Focus: Hungary’s Macro Risks Rising Again

Summary

• Fiscal loosening ahead of the 2026 general election would raise Hungary’s already-elevated deficit and debt levels.
• Combined with indications that Varga, or possibly Nagy, will become the next NBH governor, this points to looser fiscal and monetary policy ahead.
• While possibly boosting growth in the short term, it will not fix the weak investment environment or mounting external downside risks.

Market Implications

• With macro risks rising, EUR/HUF is increasingly likely to breach the key 400 threshold.
• Positive global sentiment on a forthcoming Fed cut could shelter the forint.
• But this will likely prove short lived. We retain our buy-on-dips stance but raise our entry target on long EUR/HUF to 390.

Orban Feeling the Heat

Hungary’s economic policy is increasingly shaped around the 2026 general election. Fiscal policy looks set to loosen, as does monetary policy with Finance Minister Varga (or possibly Economy Minister Nagy) rumoured to become the next central bank governor. Given limited fiscal space and an already-reduced rate differential, the forint again looks vulnerable to shifts in sentiment. A weakening German growth outlook, the recent drought, and a sharp drop in investment also hurt Hungary’s growth prospects.

Pre-Election Spending Already in the Pipeline

Orban’s willingness to loosen the fiscal stance reflects his desire to cling to power in 2026. The PM’s renewed populist slant stems from opposition Tisza Party’s success at the June local and European elections. Led by former Hungarian diplomat and ex-husband of former Justice Minister Judit Varga, Peter Magar’s Tisza Party won 26.9% of the vote at the EP election (7 MEPs) compared with 44.6% for Fidesz (11 MEPs). This was one of the worst results for Fidesz in two decades.

Latest opinion polls point to Fidesz on 43% support and Tisza on 32%. While government support has dropped from the highs of 47/48%, support for Tisza has also eaten into traditional opposition parties with DZ-MSZP-DA seeing support drop into single digits. But as Hungary’s fragmented opposition has posed no real threat to Orban in his 14 years in power, a weaker traditional opposition does not preclude a strong showing for Tisza.

Versus a budget deficit of 6.7% last year, current targets see a gradual consolidation: 4.5% for 2024 (revised up from an earlier 2.9%), 3.7% for 2025 and 2.9% for 2026. In line with the smaller deficits, public debt is projected to decline from 73.5% in 2023. Several fiscal consolidation measures were announced in July in an effort to keep this year’s revised target on track. Postponement of HUF675bn (0.9% GDP) in investment spending was the main spending-side measure. While on revenues, a defence contribution to be paid by banks, multinationals and energy companies deemed to have profited from the war was announced. The bank transaction tax was also raised and a new tax on FX transactions introduced.

July’s fiscal measures contributed to the largest monthly surplus in two years. But this was short lived, with August tipping back into deficit at 72% of the revised full-year target. VAT revenues are significantly below target due to weak consumption, while interest payments have also risen sharply with earlier rate hikes. Quarterly general government budget data show interest payments at 4.9% of GDP through Q1, the highest in over two decades.

Chart 1: Blue line = YTD budget deficit 2020 (HUFbn) orange line = 2021, grey line = 2022, blue dotted line = 2023, black line = 2024. Chart 2: Blue line = revenues (% YoY YTD), orange line = VAT.

Lacklustre Recovery

Weak growth has complicated efforts at fiscal consolidation. The original 2.9% deficit target was based on an optimistic 4% growth forecast, which was subsequently revised down to 2.5%. Latest indications from the government are growth of 1.8-2.2% this year and 3.5% in 2025 – broadly aligned with consensus forecasts.

Q2 GDP disappointed with zero sequential growth. A 6.7% QoQ decline in investment subtracted from growth, while government spending was also negative. Consumer spending was the main source of growth. But at 1.1% QoQ, growth was fairly subdued due to what the government see as precautionary behaviour of households. On a production approach, agriculture also subtracted from growth, as did manufacturing.

Preliminary August IP data at -6.4% YoY suggests a minimal recovery in Q3 manufacturing. This is the worst reading since December. The composition was also worrying, with transport equipment, electrical equipment, computers and electronics all recording negative growth. Recession in Germany and stalling demand for EVs are key risks for Hungary’s export-orientated economy. Still-weak consumer and business confidence are other risks.

Chart 3: Blue bars = net trade (contribution to YoY growth in pp), orange bars = domestic demand, grey line = GDP (% YoY), Chart 4: orange line = PMI (rhs), blue line = IP (% YoY, wda).

Announcement of Hungary’s looser fiscal stance is expected only later in the year, after the US presidential election on 5 November and the scheduled ratings reviews (S&P on 25 October, Moody’s on 29 November and Fitch on 6 December). This aligns with the earlier announced delay to the submission of the 2025 budget to ‘better apprehend external risks and benefit from the latest macroeconomic projections available’. Put another way, Orban assumes a win for Donald Trump will mean an end to the war in Ukraine and allow the adoption of a ‘peace budget’. Support for SMEs and families will likely feature, while the minimum wage could increase 11-12% annually according to officials.

While no revised targets are available, a looser fiscal stance when the deficit and debt are already elevated will undoubtedly hit Hungary’s risk premium and the forint. Little hope remains for progress on unfreezing the additional €20bn in EU funding.   

Power Concentration

Years of tension between NBH governor Matolcsy and Orban’s top economic team leave little doubt that Orban will appoint a more supportive candidate as the next NBH governor. Orban’s recent comments on combining the economy and finance ministries into one more powerful ministry aligns with either Finance Minister Varga or Economy Minister (and former NBH deputy governor) Nagy taking over as NBH governor.

Varga is currently the mostly likely candidate. While the appointment in itself is not concerning, the concentration of power around Orban raises the risk of a looser monetary and fiscal policy ahead.

Nagy has repeatedly criticized the NBH for what he considers overly restrictive monetary policy. Recent assertions include the NBH not being a partner of the government and that the central bank is acting like a ‘cyclops’ by being too focused on inflation. More generally, he has said the NBH needs to help boost household consumption to generate growth and government revenues.

The Trade

We wrote previously that reduced macro risks meant there was no value in chasing EUR/HUF higher. Our stance has been buy-on-dips with a move below 380 as a good entry point. But macro risks have worsened, and last month’s pause on rates did not provide a floor for the forint.

We raise our entry target on long EUR/HUF to 390.

Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)