Page 64 - bne magazine September 2023

64 Opinion
Annual inflation rates (%) in June 2023
Source: Eurostat
to IMD) plummeted last year from 39th to 46th place.
The Hungarian government has done little in the form of long-term investment into competitiveness, with severe underinvestment in education and healthcare. Hence
the government seems compelled to allow a continuous downward drift of the forint to maintain competitiveness. Rather than declare a target exchange rate, the forint is subject to unexpected market forces and speculation.
EUR to HUF Exchange Rate, 2019-2023
Given that the forint fell by about a quarter over the past five years, quite a few percentage points of inflation were imported every year.
2. Deficitspending.In2020ahighdeficitwasarguably justified by COVID-19. The 2021 continuation of high deficit spending, tax decreases and generous subsidies is best explained as electioneering for the 2022 elections. In 2022 the budgetary deficit remained unjustifiably high, at 6.2% of GDP.
3. Money supply has been growing rapidly over the past five years (except for a dip over the past year):
Money supply (M2) in Hungary, (HUF Billion)
bne September 2023
4. Malinvestment. While investment usually has the effect of improving productivity, this does not apply where resources have been misallocated:
a. Government “prestige” investments such as soccer stadia, or acquisitions of banks or telcos.
b. Private sector investments that have been distorted by grant criteria or cheap loans.
5. TheHungariancentralbankrecentlyannouncedmassive losses (HUF400bn in 2022, with HUF2,000bn forecast
for 2023) stemming from its balance sheet. There are a myriad programmes with heavily subsidised loans, while debt service costs have risen inexorably. The government recently declared its intention to rewrite central banking law to ensure losses are not borne by the central budget, allowing the central bank several years to reverse these losses. A central bank may function with losses or even negative capital, but this may erode trust in monetary authorities, particularly in a country with a 'BBB/BBB-' risk rating.
6. Corruption is inflationary. Transparency International has just ranked Hungary the most corrupt country in the EuropeanUnion.Thegovernmentpaysacorruption- inflated price for much of its procurement.
The government’s three main explanations for inflation are disingenuous:
• The Ukrainian war. This affects all V4 countries. It cannot possibly serve to explain why inflation in Hungary is higher!
• High energy prices. At close to recent peak energy prices, Hungary is locked into long-term energy contracts with Russia (the contracts themselves are confidential). While wholesale energy prices have tumbled throughout Europe over the past 6-9 months, retail natural gas and electricity prices have remained distressingly high in Hungary.
• Multinationals' price gouging. Once again, multinationals are also present in other V4 and EU countries, hence this cannot explain why inflation is
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