On Saturday the Hungarian PM Ferenc Gyurcsany resigned, thereby sparking a further increase in political uncertainty in Hungary. The Hungarian forint has dropped more than 1.5% on the news.
Even though the resignation of Mr. Gyurcsany increases political uncertainty, we would like to stress that his minority government is wildly unpopular in Hungary and it has effectively been unable to push through major reforms for some time. Hence, Gyurcsany's resignation does not really change much in terms of the possibility of reforms.
There are a number of possible scenarios for how the political situation will play out in the coming weeks. We think that the most likely scenario is the appointment of a caretaker Prime Minister - with weak political support. The most obvious candidates are former Finance Minister Lajos Bokros and former central bank governor Gyorgy Suranyi. Both candidates are capable economists and as such we think a really swift appointment of Mr. Bokros or Mr. Suranyi as new (caretaker) Prime Minister would be moderately positive for the markets.
If the parliament fails to approve a new Prime Minister within 40 days, new elections might be on the cards. We think the main opposition party, the conservative Fidesz Party, would win these elections and would be able to gain an absolute majority in the Hungarian parliament. A landslide victory for Fidesz might however not be received with any great enthusiasm by the markets as Fidesz in recent years has moved in a markedly more nationalistic and populist direction. That said, Fidesz might become more reformist once in power than the present rhetoric indicates.
The Hungarian central bank's (MNB) Monetary Council meets for its regular monthly rate decision today. We maintain our forecast for unchanged rates today, but also acknowledge that Gyurcsany's resignation slightly increases the risk of a "security" rate hike today - or at least the MNB should signal that it might hike if the political uncertainty increases further.
