Hungary for an Election Win

As a result of surging petrol and diesel prices in Hungary, its prime minister Viktor Orban announced on the social media platform Facebook that fuel prices will not exceed 480 HUF (0.0023 GBP). The price cap will last a total of three months starting in November 2021, per the Financial Times. The announcement by Mr Orban could be an effort to reduce inflation rates before the spring elections, which are said to be tight. Like almost every nation, Hungary has recently faced rising prices of petrol and diesel (31% YTD). Its fuel prices have climbed to record highs, and annual inflation has crept up steadily despite a series of central bank interest rate increases. The effects of these changes have dripped down to the Hungarian Equity Capital Markets and are visible in the prices of listed companies.

In Hungary, the share of fuel in the 2021 consumer basket was 6%. Therefore, petrol and diesel prices play a significant part in the inflation mix. The price cap at 480 HUF means that a price drop of 4-7% is needed. Thus, the change will show up in the inflation readings for November 2021 and will help keep inflation rates below 7% overall. The price cap and the reduction in inflation indicate that an increase in the global oil price will not add to inflation. In theory, this should magnify the impacts of base effects, dragging down inflation at a slightly faster pace in December.

However, the government have shifted the financial burden onto the refiners of Hungary without any reimbursement. The largest of these refiners is MOL Plc., which operate the largest network of petrol stations in Hungary and are the second-most liquid stock on the Budapest Stock Exchange. After the announcement of the price cap, its share price marked a one-day loss of 4%. Lajos Torok of the brokerage Equilor quoted that the price cap could cost MOL Plc. as much as €120m-€180m, depending on the global oil prices. This cost to MOL Plc. is further exacerbated due to the shortage of AdBlue, a supplementary liquid for diesel cars.

The shortage of AdBlue is becoming an urgent problem for MOL Plc., which has led to the state oil company announcing that it would restrict sales of AdBlue. The restriction placed by MOL Plc. has resulted in several petrol stations completely suspending the sale of AdBlue in Somogy County. An economist at Hungary’s K&H Bank has said that the price caps could be unaffordable if the market prices stayed high in the medium term.

However, if Mr Orban succeeds in his election campaign, the price cap could remain for some time. This extended price cap could affect the longer-term pricing decisions of the Bank of Hungary, increasing the need to completely separate from its peers (Czech and Polish national banks) with a significant rate hike commencing on the 15th of November. In addition to the price cap, Mr Orban has also introduced measures to boost consumer sentiment before the elections. He has increased the minimum wage by 20%, which will start next year, and has also said that he will rebate tax by 1.9 billion USD.

The multifaceted nature of the price cap will become more prominent when the restriction commences. Nevertheless, we can expect that Hungarian refineries will be at the forefront of price cap related reports. Time can only tell how Mr Orban’s policies adapt as the election results unravel.

By Joel Muir

Sector Head: Eric Hardy