RRF funds to arrive in late 2026
In late May, the new government reached a political agreement with the EU Commission on the conditional release of nearly all of the so-far-blocked EU funds. Further efforts to actually receive the money will focus on the RRF, where an extraordinarily high time pressure remains. Here, conditions will have to be met, and the funds will have to be used up by end-August, both being very difficult, despite a flexible treatment of definitions regarding utilization.
On May 31, the deadline set by Tisza for the President of the Republic and seven other constitutionally independent but Fidesz-appointed top public officials, including the heads of the Constitutional Court and other important institutions, to voluntarily step down expired. PM Magyar immediately announced that Tisza would go for the removal of these officials by a constitutional amendment, predicting that the whole procedure would likely go through within a month.
Forcing the above-mentioned public officials out of office is a life-or-death issue for the Tisza government. These people could easily block or at least critically delay the government’s efforts to pass the legal reforms required to get the RRF funds from the EU, and they could also hamper the approval of the intended amendment of this year’s government budget and of the 2027 budget, both due in the course of 2026. Failing to get through with all this would represent a major political defeat for Tisza, paving the way for a forceful comeback by Fidesz.
However, the forced removal of the President and the others carries material political risk. This is predominantly domestic, as even though some two thirds of the population thinks that the President should resign, the number of those who agree to the use of "constitutional violence" appears to be much smaller. The good news for Tisza is that it still has an excellent standing in opinion polls, enjoying more public support than at the time of the election. The so far fast-moving Tisza government aims to maintain this situation by systematically acting on the most critical democracy, corruption and civil rights issues on its pre-election problem list. Fidesz, on the other hand, is trying to make an issue of Tisza’s less advertised readiness to cooperate with the EU’s new Migration Pact, which has taken effect in recent days, and remains unfavorable for the EU’s "frontline countries" such as Hungary, despite notable improvements.
Internationally, PM Magyar is making good progress in restoring Hungary’s former position within the European political mainstream. In recent weeks, he visited Chancellor Merz and President Macron, who previously stayed away from similar talks with Mr. Orbán. Relations with Ukraine have improved spectacularly after the Tisza government withdrew another veto on the financing of the shipment of weaponry, and it clearly stood on Ukraine’s side regarding the recent terror attacks by Russia against civilian population. Most recently, a comprehensive bilateral agreement has been announced on the minority rights of Hungarians in Ukraine, on the basis of which the EU Commission is preparing to open membership talks with Ukraine without further delay.
Curiously, even Russia remains relatively positive in its official assessment of Hungary, after announcements by Mr. Magyar that his country would not send military equipment to Ukraine, and that Russia will continue to have a role in its foreign economic relations, including energy imports, sanctions permitting now, and more broadly when the war is over.
The energy situation could be best characterized by using a big question mark. Current conditions regarding supply and prices remain acceptable. There have even been some improvements in the sustainability of related administrative price controls, as the subsidies paid to support public utilities, as well as the difference between the fuel price cap and the unregulated price have recently decreased. However, continued uncertainty around the Strait of Hormuz deadlock, amidst claims of victory on both sides, appears to be an increasingly serious risk as regards future energy import prices.
Top rating agencies all held their spring reviews but kept Hungary’s sovereign ratings unchanged. None of them demanded an immediate cutback of the fiscal deficit, stressing instead the importance of the longer-term reduction of the deficit and debt ratios, and most of all, the significance of a sustained improvement of relations with the EU.
Fiscal policy is still held in a fact-finding and preparatory phase. Essentially, none of Tisza’s pre-election fiscal promises have been actually delivered yet, and no public mention of any need for immediate fiscal adjustment has been heard either, except for the efforts to immediately reduce the cost of corruption and the remuneration of politicians. The prospective disbursement of the RRF funds before end-2026 would not necessarily reduce the Eurostat-method deficit, but it would markedly lower the net debt ratio and the government’s debt service burden. By the time the draft government budget for next year is prepared in late 2026, the actual availability of the EU funds will be known. Clarity about that will be decisive regarding the actual delivery of pre-election promises and the need to go for further savings.
In April, the expansion of retail sales fell from its peak in March, but it remained reasonably strong, in a way similar to the development of industrial output. The fundamental part of the balance of payments continued to deteriorate, due to a negative trend in the merchandise trade balance. However, international reserves still rose further in April-May, due to a major inflow of portfolio investment, which led to a recent substantial strengthening of the forint.
CPI-inflation shrank in May, defying widespread expectation. The MNB is now likely to downwardly revise its standing forecast, which was prepared in late March, before the election and the subsequent strengthening of the currency. This is due to happen in late June, when the Q2 inflation report is scheduled. On the same occasion, we expect a 25-bps base rate cut, remaining on the conservative side of analyst expectations, in view of the existing risk of higher energy import prices, the hidden inflation due to administrative price controls, and the strength of consumer demand, fueled by the massive handouts of extraordinary income in the election campaign. We do not think that either the MNB or the government would prefer a weaker forint at the current juncture.
Now read on...
Register to sample a report