(Bloomberg) -- Hungary’s government is resorting to familiar tactics of interventions in the economy, leaving investors nervous that the country’s assets will keep underperforming in the run-up to elections in 2026.
Facing a sluggish economy and persistent budget overshoots, recent steps by Prime Minister Viktor Orban have echoed the market turmoil following his ascent to power in 2010. His cabinet has heaped additional taxes on the financial sector and started cajoling banks to cap mortgage rates. It is also encouraging people to invest in real estate through private pension withdrawals in what it says is an effort to cut red tape.
While milder than the grabbing of the equivalent of $14 billion in retirement funds more than a decade ago, the latest steps are unnerving investors, said Balazs Szabo, chief executive officer of Hold Alapkezelo Zrt. in Budapest, which manages about $2.8 billion in assets. The steps risk worsening swings in the forint and may not achieve meaningful economic gains, Szabo said.
“Again, a longer-term goal is being sacrificed for shorter-term gain,” Szabo, whose company mainly invests in eastern European bonds and equities, said in an interview. “This is just the start. There will be more economic stimulus steps, much of it is still coming down the line.”
Pension Funds
Away from home, Hungary has again been blocking European Union efforts to increase aid for Ukraine. For Orban’s critics, his geopolitical skirmishes merely distract from more pressing domestic weaknesses. The government has warned the economy was barely growing.
One recent idea to boost output is to let families tap as much as 2 trillion forint ($5.4 billion) sitting in private pensions — what’s left of the retirement industry after Orban’s overhaul from 2011. The plan, which the government says is voluntary, will allow people to access pension accounts to renovate or buy homes, boosting the property market.
The Economy Ministry said the pension fund plan forms part of measures connected to housing, wages and assistance for smaller companies that’s meant to lift economic growth to as much as 6% per year.
Bloomberg News has reached out to the government for further comment.
Orban is resorting to “desperate” measures to boost growth as he faces the most intense competition in an election since 2010 from Peter Magyar’s new opposition party, according to Malin Rosengren, a London-based fund manager at RBC Bluebay.
Forint Weakness
“Orban’s pro-growth agenda will come at the price of forint weakness,” Rosengren said. “The question for investors is how much he is willing to sacrifice.”
The central bank, whose leadership has departed from its earlier loyalty to Orban to question his economic judgment, has had to reconsider its monetary easing plans as the forint slid to an 18-month low. The currency hardly budged from the key 400 forint per euro level even after a series of attempts by the bank to reassure the market.
“It’s no longer costly to hold onto short bets against the forint, and the National Bank of Hungary putting a pause on cuts isn’t much of a deterrent,” Rosengren said. “Investors will be bracing for higher risk premiums and a weaker forint.”
The yield on 10-year government forint-denominated bonds hit a three-month high at the end of last week. So far this year, investing in the country’s local bonds has delivered a 3.2% loss, while a wider emerging-market bond index has had a positive return of 3.7%, according to data compiled by Bloomberg.
Bond Yields
A gathering of the country’s business elite at a hotel across the Danube from Orban’s offices in Budapest last week featured some testy exchanges. A recurring theme was the need for a more predictable environment for corporates.
Sandor Csanyi, the longstanding CEO of OTP Bank Nyrt., Hungary’s largest lender, directed some jibes at Orban’s combative Economy Minister Marton Nagy, who was sitting in front of him. Csanyi, who has often been Orban’s main companion at the premier’s beloved football matches, bemoaned the continued existence of special taxes.
“I doubt there is another country in central-east Europe whose government so actively intervenes in the banking industry with special taxes, rate caps and other measures,” Csanyi said. “Ideally, banks would be able to provide credit and grow in tandem with the Hungarian economy. Instead, we are stagnating together.”
Despite the rising domestic political competition, Orban has denied he was planning a return to the sort of pre-election budget spending that landed Hungary on the edge of a currency crisis two years ago.
Last week, Finance Minister Mihaly Varga, who’s the front-runner to become the next central bank governor, said the government would meet its revised budget deficit target of 4.5% this year and continue cutting it in 2025.
Orban may still be able to deliver his plans without a market upset in case global economic growth and the geopolitical situation are supportive, said Hold fund management’s Szabo. Even so, delivering on both budget and growth targets remain challenging.
“If things go wrong then the risk is that Hungarian bond yields will rise and the forint will weaken,” Szabo said.
--With assistance from Zoltan Simon and Selcuk Gokoluk.
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