CEE Macro Weekly: Wind of change in Hungary

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TOP MACRO THEME(S):

• Who is (not) afraid of Chinese export expansion? (p.3) – China’s export push into Europe is lowering inflation and raising competition. Poland appears to be more resilient to the Chinese competition than other CEE economies.

WHAT ELSE CAUGHT OUR EYE:

• HUN: The Tisza Party decisively won the parliamentary elections in Hungary, securing a constitutional majority (likely 138 out of 199 seats, with 98.9% of the votes counted). Voter turnout was record-high at 80%. V.Orban’s Fidesz party won 55 seats, marking the loss of power after 16 years. Our Homeland secured 6 seats. One of the key proposals of Péter Magyar’s party was to improve relations with the EU and unblock access to EU funds (their suspension contributed to a 20% decline in investment compared to pre-pandemic levels). Securing a constitutional majority will make it easier to reverse reforms introduced by V.Orban’s government that contradict the EU’s understanding of the rule of law. In his victory speech, P.Magyar called on President T.Sulyok and other leaders of independent institutions (e.g. the Chair of the Supreme Court) to step down, accusing them of being pillars of V.Orban’s system of governance. Regarding M.Varga, the Governor of the MNB, P.Magyar stated that his resignation would not be necessary if he fulfills his mandate, although the future prime minister focused on exchange rate stability rather than inflation, leaving considerable room for interpretation of this statement. He also emphasized the intention to fight corruption, including by establishing an asset recovery office, which could be created as early as June. One of the first amendments to the Constitution will be to limit the prime minister to two terms, which would effectively prevent V.Orban from returning to power. At the same time, the future prime minister has already announced that Hungary will not completely abandon Russian oil, although the party will seek to diversify its sources. From a regional perspective, it is worth highlighting the declaration to strengthen cooperation within the V4 group, including a planned first foreign visit to Poland. We wrote more about Tisza’s economic program a week ago. Tisza’s victory in Hungary’s parliamentary election may indirectly provide a positive impulse for Polish assets, mainly through improved sentiment toward the CEE region, although the scale of the effect is likely to be limited. While the decline in Hungary’s political risk premium may attract part of capital flows primarily to the local market, the PLN and — to a lesser extent — Polish government bonds may also benefit from a regional ‘CEE re-rating’, i.e., a greater willingness among foreign investors to increase exposure to CEE assets.
• HUN: President T.Sulyok suggested that he could call the first parliamentary session on May 4 and he will propose P.Magyar to become the next prime minister. The president emphasized that he will aim to preserve the rule of law, while P.Magyar reiterated that new parliament will use all its tools to remove him from his position.

THE WEEK AHEAD:

• The week in CEE will be dominated by Polish economic activity indicators for March, the first month after the outbreak of the war in the Middle East. In our view, the impact of the conflict on the real economy will be delayed and generally very limited. More volatility will be seen in inflation data (we will get Poland’s PPI for March) and sentiment indicators (data on consumer confidence in Poland for April will be interesting).