COVID-19: Huge recession projected for Hungary

COVID-19 has swept across the globe and Europe is no exception, of course. The measures put in place to contain the spread of the coronavirus and mitigate the economic fallout are expected to take their toll on growth. Although no precise impact-studies have been done yet, we do have some estimates. Morgan Stanley, for instance, published a research note, including its GDP growth (contraction) forecasts for Czechia, Hungary and Poland. Here they are:

The table shows that COVID-19 will have the most devastating impact on Hungry's GDP which is projected to contract 8.5% in Q3. 

Q4 is also expected to find hungary's gdp in negative territory at -6.9%, and morgan stanley's full-year prognosis (-5.0) is a lot worse than what the hungarian government envisages.

Morgan Stanley expects sharp recovery to start in 2021 and that GDP growth will be a double-digit figure in the third quarter next year. 

Fiscal responses are here

All of the three countries above have announced crisis-management measures. At first glimpse, Poland and Czechia came up with more ambitious programmes than Hungary, but Budapest is not done, further steps will be taken. Prime Minister Viktor Orbán has announced eight new measures aimed at making life easier for businesses on Monday.

Fiscal responses could cushion COVID-19 blows the most effectively, but monetary policy also needs to be supportive. The Czech and Polish central banks have already lowered interest rates, and the Monetary Council of the National Bank of Hungary (MNB) is set to hold its monthly policy meeting on Tuesday.

J.P. Morgan has put the spotlight on the impact of the stimulus packages on the national budgets. The Czech and Polish authorities unveiled ambitious countercyclical support packages, including spendingpledges of 2-3%-pts of GDP, and many multiples of that worth of liquidity support and loan guarantees. Hungary has thus far deployed liquidity and credit support measures, but fiscal policy has barely been used, something J.P. Morgan thinks will change soon.

Hungary

Hungary has so far announced only liquidity and credit support type measures, but José Cerveira, the author of the analysis, stresses that this delay shouldn’t be mistaken for hesitation, fiscal spending measures are likely to be known soon enough.

Last week, Prime Minister Viktor Orbán - at the request of the central bank - announced a moratorium on individuals' and companies’ loan repayments (principal and interest) until the end of the year; in addition, sectors under particular stress (tourism, restaurants for example) are free from social security payments and other small taxes (kata).

It’s hard to estimate the contribution of these specific sectors to budget revenues, but likely it is contained below 0.2%pts of GDP.

Orbán confirmed in that announcement that this is just a first set of measures to address the economic challenge posed by the COVID-19 shock. Due to the economic deterioration, J.P. Morgan has worsened Hungary’s 2020 fiscal projection to -3.5% of GDP, from 2.0% originally, and again like elsewhere in the region this includes some 0.5%-pts of anticipated fiscal response (of which only very little has been given so far in the form of tax breaks).

Poland

The Polish government announced a 9% of GDP economic support package to counter the impacts of the pandemic shock. President Duda and Prime Minister Morawiecki unveiled a countercyclical bazooka with the impressive headline value of 9% of GDP, or PLN212 billion, which, at current exchange rates, translates into EUR 47 billion, or USD 52 billion. The highlights of the package include wage subsidies (mainly for sectors more deeply impacted and independent workers), credit guarantees, deferred utility and social security payments plus a public investment boost.

The effective direct fiscal pledge is smaller, but still sizeable at around 3% of GDP. Cerveira said that in the details of the announcement they learned that, in financial terms, the package can be decomposed into a “cash component” (which he understands as the effective new direct fiscal pledge) of PLN 66 billion (EUR 14.7 billion, near 3% of GDP). This will include for example the increase in investment and wage subsides, which are effective new spending by the government. The rest is a “liquidity component” worth PLN 144.5 billion, around half of which is to be provided by the NBP in the form of the measures announced in the last two days (lower reserve requirements, repo liquidity provisions, TLTRO-type refinancing and sovereign QE). The other half of the liquidity package is done by the government in the form of deferred revenues, liquidity provision and credit guarantees.

J.P. Morgan now expects the ESA-based fiscal deficit to widen to 4.5% of GDP in 2020, with risks skewed to a worse outcome. Based on the worsening of the economic outlook, the U.S. investment bank had already lowered expectations for the budgetary outcome in 2020, from the original 1.3% of GDP, to 3%, including pre-emptively some 0.4%-pts worth of fiscal response. If we top this up by taking the spending stimulus pledged today at face value (and this government since 2015 has usually delivered all promised economic measures), we easily go above 5% of GDP, said Cerverira. Yet, the details are not fully known at this stage, and a corrected budget will probably arrive only in the second half of the year according to PM Morawiecki, so J.P. Morgan also recognizes there is room for expenditure and investments to be prioritized; in other words, the newly announced PLN 30 billion of investment for example, may be offset by cuts in originally planned projects which are deemed less urgent now.

Conservatively assuming 50-60% of the program is delivered, we estimate a budget deficit of 4.5% of GDP in 2020 and 3.2% in 2021.

The budget also relies on a series of one-off revenues, some of which could now be in jeopardy; for example the sale of 5G licenses or auctions of CO2 permits. Given the sheer uncertainty of the situation, risks to growth remain skewed to the downside and hence risks to fiscal execution are also biased in that direction.

Czech Republic

A CZK 1 trillion boost is not as big as it sounds, but it’s still sizeable support, said Cerveira. The Czech government announced its own economic protection program totaling CZK 1 trillion, nearly 18% of GDP, or, at current exchange rates EUR 36 billion (USD 39 billion). There is less disclosure of practical details than in Poland, but J.P. Morgan learned that one tenth of the package (just below 2% of GDP) consists of “direct financial aid” to businesses affected by the shock, which, according to some official comments, could include subsidies to shorter working times or compensation for losses related to COVID-19 related restrictions to activity. The remainder CZK 900 billion are dedicated to loan guarantees, which are meant to help local businesses access credit lines to keep otherwise healthy businesses alive.

J.P. Morgan expects a budget deficit of near 2% of GDP in 2020. Finance Minister Schillerova stated that a revised budget document will be in place within days, so, although we don’t have much detail now, we will have complete information shortly. For now, we assume that there will be some offsetting measures and increased utilization of EU funds, but still a decent chunk of new spending of 1.2%-pts of GDP (60% of the announced).

Like in Poland, we had already pre-emptively incorporated some fiscal response (around 0.7%-pts) in our projections, such that we now expect a budget deficit of 1.8% of GDP, interrupting a four-year sequence of fiscal surpluses.

The Czech fiscal conservatism of the past years is one of the reasons (not the only) it underperformed the region’s growth performance, but is now a potential source of resilience. Starting with the fiscal house in order, including four consecutive years of budget surpluses and a debt stock of just 31% of GDP (one of the lowest in Europe – Figure 4), the authorities have room to expand spending temporarily to a much higher degree in the event the shock proves even more disruptive than already assumed, concluded Cerveira.

Cover photo by MTI/Tamás Vasvári