Hungary gets serious warning over reliability of official data

There were several press reports over the last few months suggesting that the Central Statistical Office (KSH) may be yielding to "pressure from the top" and that is why some of its figures turn out more favourably than they should. Economists were particularly concerned about the revision of the Q2 GDP data and inflation unexpectedly retreating to under 10% in October.

Local daily Népszava has written about this on Wednesday, citing economists and former presidents of the statistical office. The experts argue that

if the ksh had not changed its methodology, inflation in october would have come in at 11 to 12% in october, against the official figure of 9.9% calculated with a new methodology.

Partly as a response to said criticism, the KSH published an article on Wednesday, declaring that "the calculation of inflation is fully in line with the European Statistical Directives [...]  and is regularly checked by Eurostat experts to ensure the accuracy of the published data."

The KSH also argues that the accuracy of the published inflation data is supported by a number of additional factors.

"Firstly, the sharp downward trend in inflation is not unique and is a general phenomenon across Europe. Hungary still ranks last among EU Member States in terms of the annual rate of monetary deterioration, but the gap observed in January 2023 is steadily narrowing.

"On the other hand, there is a strong base effect towards moderating inflation, which is now strongly restraining the annual index, given the dynamic price increases in the second half of 2022.

"Thirdly, we highlight that the 9.9% figure for October 2023 published by the HCSO differs only marginally from the 10.3% previously expected by market analysts, which also strengthens the credibility of the indicator."

The accuracy of the data has been put to doubt also because of a suspicious coincidence that invoked memories of the planned economy of the Soviet era, when official statistics did not necessarily reflected reality. (If you happen to speak Hungarian, here's a bit by Hungary's legendary stand-up comedian Géza Hofi that is a hilarious depiction of how official targets can be met in a planned economy.)

Prime Minister Viktor Orbán made in a priority months ago to bring down inflation to single-digit territory by the end of the year, and the sharp drop from 12.2% to 9.9% one month before the November "deadline" raised some brows.

The arguments of the KSH did not convince every analyst that there's nothing to see here, and red flags have started to pop up. Tatha Ghose, analyst at Commerzbank, specifically mentions the KSH's conundrum in his research note published on Thursday morning. He noted that the change in the treatment of the fuel price cap on headline inflation has apparently attracted the attention even of the EU's Eurostat. He also pointed to the alleged removal of an experienced statistician because of an unfavourable Q2 GDP print.

More broadly, the concern surrounds anonymously quoted sources claiming that there was 'pressure from the top' because the agency was not favourably reflecting the government's work – this last one is a major allegation.

Ghose admits that "it is always difficult for outsiders to assess to what extent these allegations are true, or if the magnitude of distortion to the data (that is being implied) is significant." He added that there are countries in the region, Türkiye in particular, where the reliability of official GDP and CPI statistics have been widely questioned. Russia is another country where the statistics have become wholly unreliable since last year – this one by design. 

Such examples mainly arise in sub investment-grade countries – that itself tells us something,

he said.

Ghose highlights that in the case of Hungary, alignment with EU standards and oversight by Eurostat had kept such debates at bay until now.

"To be frank, using certain locally-preferred adjustments for one-off changes to utility pricing regimes need not have far reaching implications," he said. The examples he mentioned was that (i) the Hungarian central bank (MNB) provides its own tailor-made core inflation measures; and (ii) the Polish stats office provides its own local unemployment rate estimate, which differs from the Eurostat measure.

"As long as the definitions are clear, and we have access to the Eurostat versions to cross-check the trends, it is not a major issue."

But, if the reports about dismissals at the stats office because of "pressure from the top" are to be believed, then that would mark a more systematic departure which investors should watch closely, going forward.

Ghose warned that "if the controversy were to spiral going forward, the consequences for risk premium could be significant – Hungary’s sovereign rating is only narrowly within investment grade, and

rating agencies as well as international institutions take the reliability of official statistics as more paramount than almost any other criterion.

Note that Standard & Poor's and Fitch Ratings have Hungary's ratings review scheduled for 8 December and 15 December, respectively.

The research note by Commerzbank takes the dispute formulating about the KSH's data releases to a new level. This is the first time that it is not only the national media that has covered the statistical office's affairs, such as the changes in the head of the national accounts department or the changes in the calculation of inflation.

The biggest question in the coming period will be whether the international analyst community will pick up on this news. For a statistical office, it is hard to imagine anything worse than having the credibility of its data releases widely questioned.

It is important to underline that the macroeconomic data for Hungary are generally considered credible by the international community, but it is clear that chinks in the armour are starting to appear.

If the international analyst community were to start looking closely at the issue and express uncertainty about the domestic data, this could have implications for money and capital markets. For investors, it is essential that a country's economic data are considered credible.

Cover photo: Getty Images