Orban faces perfect economic storm of his own making

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• Surging energy prices and a bulging budget deficit have already forced the government to cut back regulated gas and electricity subsidies as energy imports rose to more than 10% of GDP.

• Orban faces perfect economic storm of his own making

• October 3, 2022

• Fidesz, bracing for a tight election against a united opposition last spring after three successive supermajority victories, embarked on an unprecedented pre-election spending spree, dishing out 3-4% of GDP in tax rebates, bonus payments for the armed forces and an extra month of pensions. This drove up consumption and GDP, but the public finances are in disarray as a result.

• Headline inflation was already running at close to 8% before the war, climbed to over 15%, and is set to peak at 20% or above, according to the latest forecast by the Hungarian National Bank (MNB).

• Economists estimate that those earning the median wage of around HUF250,000 now spend half of their salaries on food and utility bills. This is expected to climb further as the winter kicks in and Hungarian households will face the impact of higher utility bills due to the partial phase-out of energy subsidies.

• Russia has become a key political and economic ally of Orban since his first election landslide in 2010. The government has defended its pragmatic stance of putting economic interests ahead of value-based foreign policy when criticised for cosying up to Eastern autocrats such as Putin and China’s Xi Jinping. The argument was that without "cheap Russian energy", the regulated retail utility prices could not be maintained.

• Although the price formula of the 15-year gas agreement with Gazprom signed in September 2021 remains secret, Hungary appears to be paying above the market price, according to these trade statistics. Analysts believe that contract prices are tied to Dutch TFF gas exchange rates with a three-month lag, unlike in the previous contract, when the price was linked to movements in the oil market.

• Based on Hungary’s gas imports of 80mn MWh, the increase of gas prices from €20/MWh in 2021 to over €200/MWh would boost the country’s energy bill to €16bn, or one-tenth of the country’s GDP, Concorde brokerage said in a recent report.

• The energy use of Hungary’s industry remains one of the highest in Europe, while the share of insulated homes is one of the lowest.

• Low retail energy prices due to price caps did not provide incentives for households and businesses to carry out energy-efficient investments over the years, for which Hungary is paying a big price now.

• Hungary has received €57bn, or 4.5% of its annual GDP, in transfers from Brussels since it joined the EU in 2004 and is a major beneficiary in the new 2021-2027 budget.