Macro: COVID-19 Update Hungary: From Heaven to Hell

Containment measures: The government declared a state of emergency, shutting schools and universities and restricting mass gatherings both indoors and outdoors. The borders were closed for passenger transport, only Hungarian citizens may enter the country. However, as of 19 March, no curfew has been ordered yet. Growth outlook/sectoral impact: The Hungarian economy was overheated in the past year, with GDP growth averaging at 4.8% yoy, over the last three years. The tourism sector will be the first to be hit and will be hit the worst. The disruption of the supply chain will have impacts on the manufacturing industry, especially the electronics industry and the car industry, plant closures have already been announced in the latter. Even when a V-shaped recovery takes shape, we expect a GDP decrease of -10% qoq in Q2 and a decrease of -3.5% for the year 2020, with a clear risk to the downside. Inflation and rates/monetary policy: Inflation had been running high in Hungary, with the current environment of low oil prices and negative economic growth in the short term the inflation rate is expected to drop, possibly below the 2%-4% tolerance band, and stay there, starting from Q2. The MNB has announced liquidity boosting measures and introduced a new daily 1w FX swap facility. Loan repayments are suspended for both corporate and household loans until 2020 year-end. We may see further measures in the coming week, such as outright government bond purchases and possibly interest rate cuts. Fiscal policy: After loose fiscal policy in the recent years, Hungary was about to tighten the policy stance and cut the budget deficit to 1% of GDP. The fist fiscal package announced is quite lean at about 0.2% of GDP approximately, further measures are expected to be designed and implemented soon, and are estimated to amount to about 2% of GDP. We expect a budget deficit in the range of 4%-5% of GDP in 2020.

This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.