Cenbank chief to start campaign against potential "powerful financial attack" against Hungary

Matolcsy started his article published in daily Magyar Nemzet today by saying that he deems the 2022 budget adopted with a 5.9% of GDP deficit target "a mistake because it unnecessarily introduces major risks into the operation of the Hungarian economy."

Consequently, the management of the National Bank of Hungary (MNB) is launching its fourth campaign for the restoration of fiscal balance

, he said, adding that the goal is to reduce the budget shortfall to around 3.0% already in 2022, by which they could achieve a rapid reduction of the debt-to-GDP ratio. A more specific goal of the MNB is to lower the deficit target to between 3.0 and 3.4%.

Matolcsy said "the starting points of the 2022 budget are wrong therefore no good budget could have been possibly built on them."

He said next year's budget cannot be a budget of the restart of the economy, as it has restarted / will be restarting already this year. He reminded that first quarter growth beat expectations, Q2 will bring double-digit growth and "we'll restore the end-2019 GDP level in the summer months."

The Governor argues that because of these factors 2022 does not need to be kicked off with a high budget gap, instead it is not only possible but also necessary to return to a previous course of equilibrium.

One of the harshest critical remarks in the article is where Matolcsy claims the 2022 budget "is the budget of inflation rather than of reboot". He argues that Hungary's speedy recovery from the crisis will bring about surges in inflation "because pent-up demand does not immediately meet with supply of similar quantity and structure on the internal market. This will make inflation leap. As it will occur in other countries, as well, imported inflation will also jump."

Matolcsy said it's wrong to accept the EU allowing a higher deficit than 3.0% of GDP, and it has happened several times that Hungary should not have listed to the EU. He said it's a concern that Hungary's debt-to-GDP ratio is the highest among the Visegrad Four countries, while it plans the highest deficit in the group and the third-highest shortfall in the EU for next year.

Continuing his lecturing of the government he goes on to say that

the risk is not the EU, rather than money markets.

He envisions a "powerful financial attack" against Hungary if money markets will think after a double-digit Q2 GDP growth that the unchanged moratorium on loan repayments, the adopted 2022 budget, the persistently high inflation and the highest negative interest rates together create an unsustainable economic policy.

He believes that

this powerful financial attack can be averated only by a targeted restructuring of the moratorium [i.e. that it can be continued only for those that really need it] and the amendment of next year's budget.

Matolcsy also slammed the cabinet for the "faulty state investment policy behind the deficit", referring to the costs of public investments pencilled in at 7.1% of GDP for 2022. He thinks that if this was to be halved, the budget would return to the course of equilibrium. He reminded that on average, public investments amount to 3.0 to 3.5% of GDP in the EU, and this is what money markets compare the Hungarian figure with.

Matolcsy also highlighted that most of the planned public investment projects would not even start in 2021 or even next year therefore "it is unecessary to burden the budget with these."

Accordingly it's worth winning the fourth campaign!

Matolcsy concluded his article with a quote by Baltasar Gracian: "A wise man gets more use from his enemies than a fool from his friends."

We have not seen any central bank Governor attack the budget so fiercely for a very long time. It is unclear what tools Matolcsy would use in his 'campaign' against the deficit target he deems overly high. In any case, the current situation is perfectly attests the sharp contfrontation between fiscal and monetary that has come to pass by the spring and summer of 2021. Interestingly enough, Matolcsy has chosen to have his article published one day before the Montary Council is expected to hike rates.

The MNB has issued a statement today, saying most familes should start repaying their debts already before the end of the moratorium (end-September) to avoid accumulating the interest on their liabilities any further.

The criticism voiced by Matolcsy did not come out of the blue. The overly high budget deficit target was slammed two months ago by the Fiscal Council when the budget bill was submitted to Parliament. The cabinet responded by saying that in order to continue economic recovery (in an election year), the country needs a 5.9% of GDP deficit even next year.

Matolcsy stood up against the 2022 budget two weeks ago at a conference where Prime Minister Viktor Orbán and Finance Minister Mihály Varga were also in attendance. Matolcsy's recommendations fell on deaf ears and MPs adopted the bill with a 5.9% deficit target without modification last week. This is why Matolcsy labelled this as the central bank's 'fourth campaign'.

Cover photo: MTI/Szilárd Koszticsák. MNB Governor György Matolcsy talks at a conference organised by business daily Világgazdaság on 9 June 2021.