Hungary's outlook: The economy is poised for a contraction amid persistent economic headwinds and rising political risks

Hungary’s foreign policy blunders and the Orban administration’s oppressive domestic actions will have real ramifications for the economy

The outlook for the market continues to deteriorate amid surging inflation and an effective freeze on the majority of new public investment projects. Ongoing tensions with both the EU and the US cast doubt on the ability of the market to attract the sizable foreign investments it enjoyed prior to 2022, which will feed into the uneasy operational environment. While FrontierView maintains its current forecast of a solid rebound in 2024, MNCs should note that risks to the base case are increasing and account for them accordingly. B2C MNCs should note that consumer spending is likely to contract in 2023, and if some of these risks materialize, the weakness will likely persist into 2024. Likewise, B2B and B2G MNCs are likely to see soft demand and should revisit their scenario planning to account for potential demand shocks in 2024.


  • Hungary signed a deal to expand Russian gas flow and renewed its commitment to cooperating with Russia on a planned new nuclear power plant.
  • The government has left the Russia-controlled International Investment Bank (IIB), headquartered in Budapest, following the introduction of new US sanctions on the bank.
  • The US Congress is drafting a bi-partisan bill that will target individuals close to Hungary’s ruling party, Fidesz, but the precise nature of the sanctions remains unclear.
  • The recent decision to block Ukrainian agricultural imports from Ukraine by Hungary, Poland, and Slovakia, will likely further exacerbate tensions with the EU.

Our View

Hungary’s foreign policy overtures to Russia have continued amid growing pressures by both the US and the EU for the government to drastically change its course. While Hungarian Prime Minister Victor Orban has recently gone as far as to call the US a “friend,” the extension of the country’s gas ties to Russia and the obstruction of Sweden’s accession into NATO will do little to mend Hungary’s relations with its Western partners. Additionally, recent attempts to introduce reforms to the education sector and the judiciary have been deemed insufficient by the European Commission, and the suspension of cohesion and national recovery funding is set to remain in place. It is possible that Hungary intends to use its current stance on Ukraine as a way of exerting pressure on the EU Parliament in a bid to unlock funding, but the move is unlikely to succeed, and the government will have to introduce more meaningful reforms.

Hungary’s foreign policy blunders and tough domestic exertion of power by the Orban administration, which continues to curtail the rights and liberties of political opponents, will have real ramifications for the economy. While EU funding should still be unfrozen by the end of 2023, the chances of this occurring are steadily being slimmed by ongoing tensions between Hungary and the West. In addition, while public finances have seen an improvement, much of the latter can be attributed to the substantial reduction in public investments and surging inflation, which reached 25.2% YOY in March 2023. Budgetary tensions are set to increase by the end of the year and likely worsen in 2024, as the government may struggle to find new sources of revenue and will need to maintain existing sectoral taxes, including the windfall tax on the energy sector. Should Hungary fail to secure EU funding by the end of the year, public investments are likely to see a dramatic decrease, which will weigh on the economy’s recovery and lead to a much more muted pace of growth. Additionally, the latter would prompt a sharp depreciation of the forint, which will feed into and prolong already-elevated inflationary pressures.

Hungary’s ongoing relationship with Russia will present another source of both short-term and long-term risks to the outlook. Hungary’s pullout of the IIB does not represent a direct risk to economic output, but it does highlight the possibility that the US might seek to introduce additional measures against individuals and institutions related to the Orban administration. The planned sanctions list will be a good indication of future direction of US policy on the matter, and MNCs should closely monitor its implementation. Finally, while the extension of the gas deal with Russia seemingly ensures supply availability, the prices of these gas flows are unlikely to be below European average prices, given their indexation to the Dutch TTF index, and may in fact expose the market to potential disruptions of Russian gas flows through the Druzhba or TurkStream pipelines.

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