Today, the European Union finance ministers approved the economic recovery plans from 12 states (i.e. Austria, Belgium, Denmark, France, Germany, Greece, Italy, Latvia, Luxembourg, Portugal, Slovakia and Spain). In the next step, these countries can now conclude grant and loan agreement with the European Commission (EC) under the Recovery and Resilience Facility — the central part of EUR 800 billion Next Generation EU (NGEU) programme.
However, in a surprising move, for Hungary, a two-month deadline on the side of the EC to assess the respective recovery plan lapsed yesterday without a positive decision. The EC said it is in further talks with the Hungarian authorities. The decision is also seen on the backdrop of strained relations between the EC and Hungary, and the controversy around the recent Hungarian amendments to the Child Protection Act, the Family Protection Act, the Act on Business Advertising Activity, the Media Act and the Public Education Act, also known in English-language media as Hungary's anti-LGBT law.
The Hungarian government previously decided not to ask for the EUR 10bn loan and claimed its intention to utilize only the EUR 7.2bn grant from the NGEU (i.e. 5% of GDP). The timeline of the NGEU utilization would start with an upfront advance payment up to 13% of the whole amount (in this case EUR 0.9% - 0.7% of GDP) already in 2021. According to preliminary plans of the EC, 70% of the total amount could be paid out by the end of 2022. In the case of Hungary that would be equivalent to approximately 3.5% of GDP. We would like to note that Hungary's budget deficit plan is 7.5% of GDP for 2021 and 5.9% for 2022, while the economy is expected to recover fast both in 2021 and in 2022 (our baseline forecast is 6% and 5.5% GDP growth respectively). The large budget deficit targets would allow to fully absorb the potential lack of EU funds inflow in 2021 and partially in 2022.
Zoltán Török is the Head of Research at Raiffeisen Bank Hungary. He joined Raiffeisen in 1997 as a macroeconomic analyst, later became the chief economist at Raiffeisen Securities and Investment and holds his current position since 2004. His main focus is on the Hungarian macroeconomy and the banking sector. He got his M.A. degree from the Central European University and his PhD from Budapest Corvinus University. He is a frequent speaker at conferences, an Op-Ed columnist in major professional sites in Hungary and teaches a university course on international finance. In his spare time, he enjoys various outdoor activities (running, cycling, hiking).
CPI inflation surprised to the upside in Russia and Hungary this week, revealing the mounting pressure on their respective central banks. Next weeks' data will reveal whether these surprises will be mirrored in the US and throughout the CEE region. The pressure will likely entice the Russian central bank to hike their key rate later this month. Another surprise was the announcement of the completion of the ECB strategic review this week, which will be implemented later this month already. Meanwhile, industrial production is set to continue its sluggish development in the euro area, whereas the dynamic is falling but remains solid in selected CEE countries.