When investors get ready for a new future

After Viktor Orban's 16-year rule in Hungary, international investors say they are primed for the once unthinkable prospect that the firebrand Prime Minister and thorn in the EU's side could be voted out of power at the weekend. Hungary's parliamentary election on Sunday is set to be the most market-sensitive in Europe this year, political analysts say, given Orban's frequent clashes with Brussels over issues ranging from immigration to his closeness to Russia.

Sharp share price falls of companies linked to Orban along with currency market volatility gauges indicating potential extreme moves in the forint, show investors are clearly betting on change, Reuters reported.

“I would say the market is positioning for an Orban defeat," said Viktor Szabo, an EM debt portfolio manager at Aberdeen in London, which has been increasing its exposure to Hungary's government bonds over the last month. Orban's position has become precarious following three years of economic stagnation, a cost-of-living crisis since the war in Ukraine and revelations about his ties to Russia.

Opinion polls point to the 62-year-old being beaten by former Fidesz party ally Peter Magyar though political analysts say there is a range of potential outcomes, including Orban clinging to power, Reuters said. Hungary's government bonds are in the spotlight for investors because a win for Magyar and his Tisza party could start to unlock some 18 billion euros ($21 billion) of EU funding that has been frozen due to concerns over democratic standards. The amount is equivalent to about 8% of Hungary's expected gross domestic product (GDP) this year.

“That money would provide a much-needed boost to investment, which has been a weak spot for years in Hungary," Szabo explained, adding that better growth would also help the government's finances. Budapest currently has one of the EU's largest budget deficits at over 5%. Its debt-to-GDP ratio is also above 70% and rising, meaning that rating agency S&P Global has the country just one downgrade away from 'junk' status. Political analysts stress the election result might not go the way polls currently indicate — raising risks for investors betting on the most market-friendly outcome of victory for the pro-EU Tisza party. "In the current situation, anything is possible from a Tisza constitutional supermajority to a Fidesz majority," political scientist Andrea Szabo said. She cautions the polls may be underestimating support for Fidesz. The far-right Our Homeland party could also win enough support to become a "kingmaker," opening a path for Fidesz and Orban to stay in power.

In any case, the EU's longest-serving leader may not go down without a fight, potentially complicating any transition to a new government, some analysts warn. While Hungary's currency, stock market and bonds have largely outperformed on the prospect of a Tisza victory, without a parliamentary supermajority — something analysts at JPMorgan see as only a 5-10% probability — rolling back even Orban's most contested policies would be complicated.

"The European Commission has previously released funding in response to reforms, so a Tisza government could plausibly secure access to limited tranches," analysts at Capital Economics said.

"That said, it's unlikely that the EU would formally lower the thresholds for unlocking frozen funds."

The outcome of the vote will also affect other countries such as Ukraine — where Orban is currently blocking a 90-billion euro ($105.15 billion) EU loan – and others around Europe where right-wing populists are eyeing power.

The forint, meanwhile, which has fallen around 20% against the euro during Orban's time in power, has a history of sharp swings around political risk which look set to continue.

Short-term FX volatility gauges are now higher than at the start of both the COVID pandemic and 2022 Ukraine war. Analysts at Morgan Stanley estimate the forint could jump as much as 10% against the euro if Tisza wins, while JPMorgan predicts a drop back to 400 forints per euro if Orban remains in power.