Hungary Watch: EC unwilling to approve Hungary's Recovery Plan yet

The EU Commission yesterday missed a deadline to approve the Hungarian Recovery Plan. Additional talks will delay the disbursement of grants and loans under the NGEU programme possibly for several months, while we still see a solution later this year as the most likely scenario.

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.

Our take

  • An EC spokesperson suggested that there is going to be a proposal for an extension for the assessment of the Hungarian plan.
  • It is difficult to foresee how long this extension will last, but it may be quite lengthy (i.e. several months).
  • According to Hungarian Finance Minister Varga, even if Hungary receives no funding, this year's GDP growth is not affected.
  • Our base case scenario is that an agreement will be achieved by the autumn, and the first tranche of EU grants will be paid out before the end of the year.
  • It is possible that the issue will be resolved sooner (10% chance) and also that no agreement is achieved in 2021 (30% chance). In the latter case, 2022 GDP might be negatively impacted. However, an agreement could be still achieved during 2022, therefore the negative impact should be limited, if at all.
  • We evaluate the scenario that Hungary will not get access to the EU grants as extremely unlikely.
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Zoltán TÖRÖK

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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).

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