Analysts deem Hungary's coronavirus package too small

So far, the cabinet has announced five plus six measures to migitage the economic fallout from the spread of the novel coronavirus (COVID-19). We asked macroeconomic analysts how they perceive the steps. There were seven questions and seven research houses replied anonimously. 

Package is too small

One of the most important issues is whether the combined size of the measures announced so far is adequate or not. The average of the scores given by the analysts (on a scale between 1 and 10) is 3.1, which means

there's a consensus on the market that the series of measures unveiled so far will not be enough to offset the impacts of the current crisis.

Some respondent firmly rated the measures as 1 and the best score was 6. 

Several analyst remarked that more needs to be done. One of them thinks that five or ten times as much should be spent than what these 11 measures encompass, and this temporary surge in expenditures could be covered from bond purchases by the central bank, as in nearly every other country. He also reminded that the European Commission temorarily shelved the deficit rule, i.e. the cabinet no longer needs to be concerned about the budget shortfall potentially exceeding 3.0% of GDP. 

Another analyst noted that while the crisis packages announced in Asia, elsewhere in Europe and the United States often amounted to 15-20% of the given country's GDP, the Hungarian measures unveiled so far add up to merley 0.4-0.5% of GDP.

A third analyst said the steps heralded by Prime Minister Viktor Orbán's government are moderate at best, not only compared to the severity of the crisis but also in relation to the massive fiscal wiggle room the cabinet has.

"These tax breaks will not be of help to businesses that cannot generate enough revenues to cover fixed costs due to the suspension or limitation of production."

We've also asked how large impact the five plus six measures would have on the budget. The estimates were on a rather wide scale here, between HUF 80 billion and HUF 250 bn. The average is somewhere around HUF 150 bn as to the maximum fiscal impact. 

Here are a few articles about the size and impact of the 'coronavirus packages':

Targeted measures

The analysts were also asked to give a score (on a scale of 1 to 10) on the targetedness of the measures. The cabinet did better in this 'test', with an average score of 6.5.

Other crisis-ridden sectors should also be helped out and the focus should be on retaining jobs before everything else, one of them commented on the issue of how targeted the steps are. He also made recommendations. By the introduction of short time (Kurzarbeit in German), income supplements, support for incomes or guarantees the cabinet must ensure up to 75-80% of the original income for those that are laid off, sent on leave without pay or who need to stay home with their child/children. This is already done in about a dozen economies. 

"This is not a demand-boost, rather than stabilisation. You may think of it as an investment to make sure the post-virus economy restarts more rapidly, purchasing power does not decline substantially, deferred consumption is made up for, not too many employees are sacked and the damage to the supply side remains as muted as possible, one of the analysts said. He added that when a business loses all of its revenues, the payment of even the net earnings becomes questionable and lowering contributions in itself is simply not enough for a lot of businesses. 

"The loan repayment moratorium does help indebted corporates (and households) but it does not help those that do not owe banks money (while they do need to pay rent, for instance)."

Another economist pointed out that the measures announced so far provide assistance mainly for the hardest-hit sectors, while "given the structure of the economy and the tight integration of European and domestic supply chains the sickness of one sector is not exclusive and it spils over to other segments too."

A similar view was heard by another analyst who says one of the main disadvantages of the measures we have learned about is their extremely humble incentive effect. "The direction of the 5+6 programme is good, but this is a safety net for a limited number of cases. These measures are not suitable for real economic stimulus, but as far as we are concerned they should be regarded only as social measures. The bigger guns aiming at restrating the economy are yet to be presented."

Growth tumbles, budget ripped apart

We also wanted to know that in view of their current information how large GDP growth (or contraction) the analsyts expect this year, and how large the budget deficit could swell as a consequence of the coronavirus-related measures and the worsening growth outlook. We should not forget that there is a connection between these two factors. The balance of the budget is influenced not only by the steps the government has taken and will take to mitiage the economic fallout from COVID-19 but also how GDP turns out. As for the latter, the outlook is not so bright in light of the recession prognoses for the rest of the world and the spillover effects. 

The most upbeat estimate for Hungary's 2020 growth was 0.5%, but some of the anaysts forecast 6% and even 7% recession for this year.

The estimates may be interpeted two ways. Firstly, the cabinet is facing a huge challenge when estimating its potential fiscal manoeuvring room. Secondly, the message could also be that

if the government fails to deploy a bigger and more efficient arsenal hungary should brace itself for a huge recession.

It is no suprise that all respondents project a sharp rise in Hungary's 2020 budget deficit. The official target is 1.0% of GDP, while the consensus estimate in our survey came to 2.8%. In view of this, we should say the fiscal wiggle room is rather narrow, given the 3.0% of GDP EU deficit threshold. However, the European Commission has made an uprecedented move of temporarily suspending its budget deficit rule. So, the government is no longer restrained in this sense and may spend as much as it wants. 

The Commission proposes the activation of the general escape clause of the Stability and Growth Pact (SGP) as part of its strategy to respond quickly, forcefully and in a coordinated manner to the coronavirus pandemic. (The escape clause has never been activated since its addition to the SGP in 2011.) The escape clause will remain in effect for as long as necessary. 

Alright then, what could be next?

Naturally, we also asked the economists what kind of additional measures they think the government will implement in a bid to restart economic growth. Several respondents mentioned job protection plans, assistance for the processing industry and public investments. 

Others mentioned Germany as an example, where small companies and individual freelancers like artists and caregivers are to be eligible for up to 15,000 euros in direct subsidies over a period of three months. A total of EUR 50 billion has been earmarked for this programme.

One of the economists thinks that distressed businesses in the service and productive sectors could be assisted by a long-term (10 years or more) interest-free allocation provided by a public salvage fund that should cover wage costs, e.g. up to the minimum wage for the duration of the pandemic. 

In respect of possible new stimulus measures another analyst suggested taking a look at the steps taken in Western and Eastern Europe over the last two weeks. The fiscal packages generally contained state loan guarantees, subsidised loans and acquisitions that manage reduced activity triggered by the outbreak on a wider scale.

Another economist firmly believes that the measures announced so far are a harbinger for a programme that will help re-hiring and getting people back to work. "A more serious demand stimulus programme is also expected to be launched by the government, which may be manifested in asset purchass or other infrastructural investments."

Several respondents emphasised that all of the above will be difficult to achieve without an intervention by and the activity of the central bank. "Simultaneously with the government's efforts the MNB should announce government security purchases to keep the market together in the wake of a likely boom in debt issuances, and also to ensure that debt accumulation induced by the temporary measures takes place at the lower costs possible. Consequently, yields on the longer end of the curve must also be pushed lower."

Cover photo by: MTI/Zoltán Mihádák