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Hungary’s ‘Fair’ Windfall Tax Gets Cold Shoulder From Investors

·3 min read

(Bloomberg) -- Hungary announced a sweeping set of new taxes aimed at shoring up its bloated budget, sending the country’s stocks down by the most in nearly three months.

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Budapest’s BUX stock index was the world’s worst performer on Thursday. It tumbled as much as 9.8% before closing 5.5% lower as the windfall-tax plan turned out less severe than some investors expected. Bond yields jumped but the forint advanced.

Repeated spending hikes by Prime Minister Viktor Orban’s government, which won re-election in April, helped Hungary’s economy fight off the fallout of the pandemic and ease the impact of surging inflation, while inflating the budget deficit.

The new levy is set to bring in up to $2.5 billion and accounts for 40% of the planned fiscal consolidation, while the remaining 60% would come from savings and spending cuts, Economic Development Minister Marton Nagy told reporters. The UK also slapped a windfall tax on oil and gas companies on Thursday.

“The optics of the fiscal adjustment improved a lot,” said Peter Virovacz, an economist at ING Groep NV in Budapest. “With that planned 60/40 split between expenditure and revenue, markets might calm down sooner rather than later.”

Alarmed Investors

The tax proposal was the latest in a series of developments that had alarmed investors as Hungary slips further away from its European Union and NATO allies.

Orban -- the EU leader closest to Russia -- started his fourth consecutive term in power this week by declaring a state of emergency just after he pushed through a constitutional amendment allowing the government to rule by decree in situations such as war in neighboring Ukraine.

In a video message on Wednesday evening, the premier said that this year and next he seeks to siphon off to the budget “the bulk” of what he called the “extra profits” in key industries -- hitting the forint and local shares.

Markets stabilized nearly a day later after Nagy detailed the plans, which would be primarily funded by a 300 billion forint ($823 million) tax on the banking industry and an equally sized levy on the energy industry, the bulk of which would be paid by refiner Mol Nyrt. Other targeted industries include insurance, telecommunications, airlines, retail, advertisement and pharmaceuticals.

“The levy on excess profits is fair since we’re not taking away all of the profit from anywhere, only a significant portion to meet our goals,” Cabinet Minister Gergely Gulyas said.

Mol, which has seen its profit rise from selling Russian crude, was the worst BUX performer on Thursday, dropping 9.1%, followed by the country’s largest lender, OTP Bank Nyrt., which declined 8.2%. Magyar Telekom Plc, a unit of Deutsche Telekom AG, retreated 4.4%.

The yield on Hungary’s benchmark 10-year local-currency bond increased 11 basis points to a one-week high of 7.01%. The forint swung wildly, first losing as much as 1% against the euro and approaching a record low, then strengthening by 0.2%.

The fresh financing, along with the expenditure cuts, will help consolidate the Hungarian budget as the EU imposes an effective funding freeze against Orban’s government, which it accuses of flaunting democratic norms.

The tax moves, even if they appeared less severe than investors anticipated, mark a reversal from the past years when Hungary tried to put on a more “business-friendly” face, according to Michal Konarski, an equity analyst at MBank SA in Warsaw. “We should expect extra premium applied to the cost of equity,” he said.

(Updates throughout with analyst comments and latest markets.)

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