WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Sándor Richter

• A new law allows PM Viktor Orbán the right to rule by decree, without any fixed time limit.
• An attempt to strip the municipal authorities – the final bastions of the opposition – of some of their powers was announced, but then withdrawn.
• The record low HUF/EUR exchange rate at the end of March caused the central bank to abandon its extremely loose monetary policy.
• The main instrument for managing the economic crisis is a loan repayment moratorium, for both businesses and households. Income-replacement and other measures were announced on 6 April in a second economic package.

Heading for unlimited autocracy

On 30 March, the Hungarian Parliament passed into law new emergency powers that will allow the government – in effect, Prime Minister Viktor Orbán – the right to rule by decree, without any fixed time limit. The law was approved by 137 votes to 53, with no abstentions. All opposition MPs voted against the bill.

The law prohibits by-elections and referendums, and increases the penalties for breaking the quarantine and for spreading misinformation. Human rights activists warn that Orbán has been given carte blanche to further restrict freedom of speech in Hungary.

As feared, soon after the ‘enabling act’ came into force, the government embarked on an offensive in various political spheres, with the announcement of 15 new legislative proposals. Most have not the slightest connection to the coronavirus pandemic. One proposal was to strip the municipal authorities of some of their powers. This is a crucial issue, since in the 2019 local elections, the combined opposition secured the mayoralties of Budapest and several other key Hungarian cities, and gained a majority on the city councils – a clear threat to Orbán’s autocratic rule. But the proposal was withdrawn within 24 hours, with no explanation. It is not yet clear whether Orbán simply changed his mind (as he often does), or whether the U-turn was caused by a rebellion of the mayors (even those aligned with Fidesz), or behind-the-scenes international protest, or the abrupt fall in the HUF exchange rate.

Farewell to exceptionally loose monetary policy

The HUF/EUR exchange rate fell dramatically in recent days: the 2019 average exchange rate was HUF 325.3 to the euro, and the year-end rate was HUF 330; but on the afternoon of 1 April, after unusually high volatility in the first quarter of 2020, the HUF collapsed to a historical low of close to HUF 370 to the euro. That is a devaluation of over 10% in three months.

At this point, the central bank, which – for ideological-political reasons – had been sticking by its extremely loose monetary policy, with deeply negative real interest rates, finally changed its policy.

In the wake of the exchange rate’s record low, the National Bank of Hungary notified its clients that due to what it called ‘liquidity developments of recent weeks’, it had ‘decided to announce its one-week deposit instrument on a regular basis … The one-week deposit instrument has a fixed interest rate and is remunerated at the 0.9 per cent base rate, as opposed to the -5 basis point interest rate on the O/N deposit instrument. The one-week deposit instrument is available for the Bank’s monetary policy counterparty institutions.’ This waves an unambiguous farewell to the central bank’s exceptionally loose monetary policy. The move saw a modest strengthening of the national currency to HUF 362 to the euro.

On 7 April, further important changes were announced by the bank. One measure that is expected to have an immediate impact is the raising of overnight and one-week collateralised lending rates to 1.85%. The one-week deposit rate remains at the 0.9% base rate; however, it is now being allowed to deviate from the base rate upwards or downwards within an interest rate corridor. Further measures include the launch of a government security purchase programme on the secondary market and a relaunch of a mortgage bond purchase programme. The central bank will undertake further steps to ensure affordable funding for businesses, in a package worth HUF 3 trillion (EUR 8.3 billion).

Crisis management – with question marks

In terms of size, Hungary’s initial response to the economic aspects of the Covid-19 crisis has been far more modest than similar packages in other countries. The main instrument is a moratorium on loan repayments, for both businesses and households. This raises the free-rider problem: the measure is not focused on those who really need it. For businesses that are not (or are only moderately) impacted by the crisis, the moratorium is unnecessary – as indeed it is for households where nobody has lost his/her job or regular income. The measure also unnecessarily complicates the position of the financial sector. It dramatically reduces banks’ income; they may react to this by restricting the issue of new loans and by rolling over existing credits, leading to difficulties in the day-to-day operations of still healthy enterprises. While several non-needy households will benefit from the loan repayment moratorium, broad swathes of society on low income and with no credit will see no improvement in their income position.

Unemployment benefit in Hungary is paid for only three months. The opposition and independent experts have been calling for an extension of unemployed status and benefits, but the government is against that: cutting the duration of unemployment benefits from nine to three months was one of the pillars of its unorthodox ‘work-based’ economic policy. However, as the pool of jobless people has dramatically increased (and will continue to do so), there will be a sharp decline in incomes – and consequently in aggregate demand, which will further entrench the economic crisis. Experts maintain that income replacement and top-up measures would be the most appropriate in the current situation, but these did not feature prominently in the Hungarian government’s first anti-crisis package.

Back when nobody was thinking of the Covid-19 virus, the government was planning a 1% budget deficit for 2020, with 3-4% economic growth. That growth rate can be shelved now: the question now is how big the recession will be. As an indicator of proper economic policy, the size of the fiscal deficit has lost its importance. Instead, sufficiently large and well-targeted fiscal stimulus will be key to dealing with the economic impact of the Covid-19 crisis.

On 6 April, the Hungarian government announced a second economic aid package, amounting to 18-20% of GDP. It includes the state paying a portion of the wage bill of firms affected, the launch of investments, assistance in kick-starting certain sectors hit by the pandemic, new preferential loans for businesses and the gradual reintroduction of the thirteenth-month pension. No details are yet available. As for how the package will be funded, the government has hinted at special taxes being levied on multinational retail chains and on the commercial banks; furthermore, it expects massive contributions from the municipal authorities (whose resources have been largely centralised in recent years). The government now reckons on a budget deficit of 2.7% of GDP for 2020. That seems completely unrealistic, considering the size of the package.