Eurasia Group Sees Hungary on Track for Eurozone Membership Despite Budget Pressures

In the short term, some slippage is expected in the Hungarian budget due to drought damage and geopolitical shocks, but even so, it appears likely that Hungary will be able to join the eurozone in 2032, based on an assessment presented Thursday in London by the Eurasia Group, one of the world’s largest political and economic risk analysis firms.

The firm stated that its current forecast is for Hungary’s general government deficit, as a percentage of gross domestic product (GDP), to rise to around 7.7–7.8 percent this year. The greatest pressures on the budget—primarily high oil prices and damage caused by the prolonged drought—stem from factors beyond the Hungarian government’s control.

At the same time, markets have already begun to react to the weaker deficit expectations over the past month; as reflected in the rising price of credit default swaps (CDS), which are linked to the risk of sovereign debt default, according to Eurasia’s analysis on Thursday. The firm expects Hungary’s public debt-to-GDP ratio—which stood at 75.6 percent in the middle of the year—to likely approach 77 percent by the end of 2026, although market borrowing needs associated with the pre-financing of European Union disbursements will also play a role in this.

Given that Prime Minister Péter Magyar is reluctant to take policy measures that would “directly harm voters,” he is likely to lean toward imposing additional taxes on large corporations.

The main difference, however, is that Péter Magyar will present these measures as temporary sacrifices made in the interest of eurozone membership, with the goal of having Hungary join the ERM II exchange rate mechanism—a prerequisite for euro adoption—by 2030, according to analysts at Eurasia in London.

Based on this, the firm also considers it likely that Hungary will join ERM II by 2030, and if successful, this could pave the way for eurozone accession in 2032, given that a country must spend at least two years in ERM II before joining the currency union.

If Hungary does indeed join ERM II in 2030, it would be a “resounding political success” for Péter Magyar, and joining the eurozone in 2032 would “cement Hungary’s position within the EU,” according to the Eurasia Group’s analysis released Thursday in London.

If this timeline materializes, it would likely have positive market implications; for example, it could open the door to further yield convergence between Hungarian sovereign debt denominated in forints and euros.

Other major London-based research firms have also issued similar forecasts regarding Hungary’s public finance outlook in their recent assessments. Fitch Ratings, an international credit rating agency, examined the public finance and macroeconomic outlook for the broader Central and Eastern European region in a recent study. In the Hungary chapter of its 24-page analysis, it stated that it expects Hungary’s general government deficit, as a percentage of gross domestic product (GDP), to reach 7.3 percent this year.

However, Fitch anticipates that the deficit will fall to 5.8 percent by 2027, and in its analysis also highlighted that the Hungarian government intends to use the commitment—under which Hungary will meet the criteria for joining the eurozone by 2030—as a cornerstone of its medium-term consolidation efforts.

Via MTI; Featured photo: Pixabay

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