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(Bloomberg) – The government of Hungarian Prime Minister Viktor Orban is fighting back growing criticism of fiscal management, which investors say could spiral the recession-hit economy.
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Finance Minister Mihaly Varga insisted the country’s plans were on track after the European Commission this week pointed to “weaknesses in budget planning and execution” and “ad hoc” spending that would exacerbate the dire situation.
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Hungary “disputes” the assessment, Varga said on Thursday, rejecting a recommendation by the European Union executive to cut lavish energy subsidies.
“We are on track to hopefully bring the budget deficit below 3% of GDP next year,” he said. “I wouldn’t call that a structural problem.”
The budget has run a record deficit for the first four months of the year and confidence in the government’s ability to deliver on its commitments is fading. Even the Fiscal Council, a government body responsible for advising on public finances, has expressed doubts.
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“Meeting the deficit target overall can be considered risky,” says its report to Parliament this week.
Hungary has suffered more than any other EU member from Europe’s cost of living crisis, as rising food and fuel costs helped push inflation to a record high of over 25% earlier in the year.
Orban responded by capping food and fuel prices and subsidizing electricity bills to protect Hungarians from rising energy costs.
While fuel price caps have since been removed, discretionary spending has undermined fiscal consolidation, including the $1.9 billion purchase of Vodafone Plc’s Hungarian business, a stake now majority-controlled by a company related to Orban.
Until recently, investor attention was focused on the EU’s prime central bank interest rate, which stood at 17% this week after a one percentage point cut, attracting hot money to anchor one of the world’s most volatile currencies.
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But sky-high borrowing costs helped deepen the recession, from which the government will not emerge until the third quarter. Tax revenues have fallen as a result of a slump in consumption, while the rising cost of paying down debt has led to an increase in spending.
In addition, the EU has frozen more than €30 billion ($32 billion) in grants and loans over corruption and rule of law concerns, adding to the financial strain. Earlier this month, the government raised its deficit target for 2024 and 2025, just months after abandoning this year’s target and falling short of last year’s target.
“The extent of financial deterioration varies widely across emerging markets, and Hungary is one of the worst offenders,” said Eimear Daly, strategist at NatWest Markets. “I do believe that there is a risk that the focus of the market will shift from monetary policy to fiscal policy in the medium term.”
Now the government may need to take more action to boost revenue, including reversing a pledge made last year to scrap taxes on banks, energy, pharmaceuticals, retail and airlines.
The budget hole that Varga needs to fill is about $3 billion, said Viktor Zsiday, portfolio manager at Budapest-based Hold Asset Management.
“Hungary is in a precarious position financially,” he said. “Investors are lured by high interest rates, but most of them are on the verge of exiting and could exit at any moment if bad news comes in, such as on the fiscal position.”
