• A meeting with ANO leader Andrej Babis is already scheduled for Sunday morning
• Pavel will meet other party leaders at a later time, and will reveal his plans for the procedure later on Sunday
• Appointing the next PM is quite important, as a new government takes over immediately, even before it obtains a vote of confidence from the lower house

President Petr Pavel intends to launch government formation talks on Sunday (Oct 5), i.e. the day after the general election, Vit Kolar, head of Pavel's communication office, told Seznam Zpravy, a news site. There is already a meeting with ANO leader Andrej Babis scheduled for Sunday morning, and meetings with other party leaders will soon follow. Pavel will reveal his plans in public on Sunday afternoon.

We remind that Pavel met Babis earlier this week, discussing the legal proceedings against him, as well as his potential conflict of interest. After the meeting, Babis promised to do everything in his power to remove any potential conflict of interest, as required by Czech and EU law. He didn't commit to selling his stake in Agrofert, a major fertilizer producer, which is the main reason Babis is facing conflict issues. Agrofert is a major beneficiary of EU funding, and it is the reason the European Commission has withheld some subsidies to the company.

Regarding the government formation process, it appears that Pavel wishes to accelerate it as much as possible. There is no deadline when Pavel needs to appoint a prime minister candidate. However, once appointed, the new government will take over immediately, before it has obtained a vote of confidence from the lower house. Furthermore, that government will remain in power even if it fails to receive a vote of confidence, so appointing the next prime minister will be quite important. We remind that Milos Zeman waited for 6 months before he appointed a permanent government in 2018, after the first attempt of a minority ANO government to receive a vote of confidence failed. This was considered an abuse of power back then, so the odds are Pavel will try to avoid such a scenario this time.

• The finance ministry bought CZK 2bn of bonds into its portfolio
• Gross financing needs were covered at 79.9% as of Oct 2

The finance ministry did no top-ups to the government bond auction on Oct 1, according to auction data reported by the CNB. Thus, the borrowed amount remains at CZK 13.9bn, quite above the CZK 10bn borrowing ceiling, and 50% of the monthly borrowing ceiling. We remind that there are two more bond auctions scheduled in October, on Oct 8 and Oct 22. The finance ministry did purchase CZK 2bn of bonds to its portfolio.

Based on the information above, we estimate that debt instruments maturing after the end of 2025 have reached CZK 443.8bn. The amount breaks down to:

• CZK 304.1bn in CZK-denominated government bonds;
• CZK 90.7bn in net bond purchases to the issuer's portfolio;
• CZK 40.5bn in CZK-denominated T-bills;
• CZK 12.2bn equivalent in EUR-denominated T-bills (EUR 0.5bn original value);
• CZK 1.3bn in retail bonds (H1 2025 only);
• CZK 7.2bn in loans (H1 2025 only).

Operations with financial assets added up to a net inflow of CZK 9.4bn in H1 2025. However, the funding and debt management strategy for 2025 envisages a net inflow of CZK 7.4bn only. Gross financing needs are projected at CZK 567.5bn in 2025, which means they were covered at 79.9% as of Oct 2. If we only include the financial asset flows as projected, the cover ratio was at 79.5%. We remind that this estimate is strictly unofficial and some data is outdated. An update to retail sales, loans, and operations with financial assets in Q3 will be available on Oct 17.

• Progress will be seen in September, as budget data shows gross EU flows of CZK 21bn

No payments were reported from EU cohesion funds in August, according to figures from the regional development ministry. It makes it the third consecutive month without any progress, even though national co-financing payments have continued. It leaves the absorption rate at 15.6% of total allocations as of end-August. However, there will be a development in September, as according to the latest budget report, gross EU flows were CZK 21bn in September, and the bigger part was likely through cohesion programmes. Thus, you should expect some progress in September. We remind that this report covers only cohesion programmes, so the RRF payment of EUR 1.57bn due in October, will not be accounted for here.

Data Download

As far as progress is concerned, the absorption rate is almost the same as in the respective period of the 2014-2020 MFF, at 15.6% against 15.4% in August 2018. Similarly, progress was reported in the final quarter of this year, and it appears everything has remained similar, as far as actual payments from the EU budget are concerned. Where this government has excelled is project approval, as it has reached 65.3% of total allocations, compared to only 24.7% at the same time of the 2014-2020 MFF.

• Take any numbers in this budget as provisional, since ANO is likely to submit a new budget in early 2026
• The macroeconomic framework is cautious, GDP growth is projected at only 2% in 2026
• General government deficit projected to remain flat at 1.9% of GDP, structural deficit will remain at 1.7% of GDP
• We estimate gross bond issuance will reach 5.6% of GDP in 2026, while net issuance will be 2.8% of GDP; estimates are strictly unofficial, though
• There are only a couple of discretionary measures to speak of, one of them being a 7.5% average wage hike in the public sector
• Defence and energy are the sectors to see the greatest increase in spending
• Gross EU flows to be lower by almost 10% due to smaller RRF payments planned
• This budget bill is largely inconsequential, as we doubt it would be in this state if the ruling parties had a chance to remain in power

The 2026 budget bill is a weird one, as it is the first one we have seen in a while that feels mostly as a placeholder, than an actual budget. The reason is the general election, which is due on Oct 3-4, which will likely lead to a shift in government, and consequently an entirely new budget. ANO, the party that will likely lead the new government, has already promised, on numerous occasions, that it intends to withdraw this bill and write a new one, which is expected to happen in late February 2026. This mirrors what happened with the original 2022 budget bill, which ANO prepared, but then the current government withdrew and submitted its version. If there is no regular budget, a provisional one comes into play, which caps monthly spending at 1/12th of expenditure during the previous calendar year. Typically, it doesn't impact day-to-day operations much, but public investment tends to get delayed.

Thus, consider everything you see in this bill as provisional, and not reflecting the policy of the next government. Unfortunately, ANO didn't paint a clear picture of its fiscal policy plans, but the odds are that its budget will be much more expansionary, though nominally within SGP constraints, i.e. a general government deficit under 3% of GDP.

Macroeconomic framework - cautious amidst high external uncertainty

There is nothing that particularly stands out here, with "caution" being the key word. GDP growth is expected to remain modest, at 2% in 2026, which is in line with market expectations. Investment is expected to recover, but mostly due to inventory depletion, so the odds are recovery will be muted, mostly reflecting a low base. Inflation is projected to remain above the 2% target but relatively moderate, the labour market will remain tight, while the CA surplus should narrow, reflecting weak external demand and tariffs. Euro area growth is projected at only 0.5% in 2026, which should be the main warning sign, as any hopes for a major recovery will be subdued because of it.

This could be an argument on its own why the 2026 budget bill is cautious as well, as no one should count on a major revenue increase in 2026. The only positive development is that a strong CZK will likely mitigate any external price pressure, though given how low fx debt is, it will not matter much for public finances.

No shift in structural fiscal position planned

The structural fiscal position is expected to remain unchanged, with the structural fiscal deficit to remain at 1.7% of GDP in 2026, the same as in 2025. There are no expectations to shift the general government deficit target, either, which is maintained at 1.9% of GDP. This reinforces the impression that without any policy change, which is very much the case with this budget bill, there will be no further improvement in the medium term. Yet, no government will do fiscal consolidation in an election year, even if necessary, so this is in line with expectations.

General government debt is expected to keep rising, however, reaching 45.5% of GDP at end-2026. This is still moderate for the AA credit rating group, and it remains far from the critical level at 55% of GDP, which activates a mandatory fiscal consolidation effort, as per the fiscal responsibility act. The main thing here is that if you don't do anything from here onward, debt growth will be inevitable, to a point where it will become difficult to sustain, in a decade or so.

As another evidence for policy stagnation, the effective tax burden will remain effectively unchanged, at 33.1%, as it has been in 2024 and 2025.

Financing, gross and net bond issuance

There has always been an issue with estimating gross and net government bond issuance in the Czech Republic, as unlike some other countries, like Poland, there is no detailed breakdown by instruments in the financing section. Furthermore, the finance ministry only announces debt issuance calendars month for month, so we have no idea what debt instruments will be offered in November and December. Moreover, borrowing ceilings are always indicative, i.e. the finance ministry has full discretion to go over or under declared limits. Thus, please be aware that our estimates below include several assumptions, which will likely turn out to be at least somewhat inaccurate. The only precise numbers are those in the funding and debt management strategy, which is traditionally published in the first week of January. This time, it will be delayed to February or even March 2026, given that a new budget will be prepared.

Here are some base assumptions. We expect that the finance ministry will continue relying on money market instruments in Q4 2025, which means it will add CZK 30bn in CZK-denominated T-bills and EUR 0.5mn of EUR-denominated T-bills that mature in 2026. According to the latest finance ministry data, amortisation of government bonds and T-bills should reach CZK 324.2bn in 2026, out of which CZK 249.3bn in bonds and CZK 74.9bn in T-bills. Loan amortisation is projected at CZK 26.5bn in 2026, according to the latest update to the 2025 funding and debt management strategy.

All this puts the gross borrowing requirement to CZK 636.7bn in 2026. Based on current government debt structure, the net amortisation of short-term foreign debt, at CZK 11.9bn, matches exactly outstanding foreign short-term loans, so we assume that no new loans of that kind are planned. There is also a net issuance of CZK 3.6bn of short-term domestic debt, which we expect to be entirely through T-bills. Our assumption for maturing T-bills in 2026 is CZK 74.9bn, which includes our estimates for T-bill issuance in Q4 2025. Thus, this puts gross T-bill issuance at CZK 71.3bn in 2026.

Moving on to loans, the latest update of the funding and debt management strategy puts loan amortisation at CZK 26.5bn in 2026. Since the finance ministry has a clear preference to issue debt in the domestic market, we will assume that the net issuance of foreign long-term debt will be entirely through loans, likely from IFIs. This will put gross borrowing through loans to CZK 73bn in 2026.

Based on all this, we estimate that gross government bond issuance should add up to CZK 492.4bn (5.3% of GDP), while net bond issuance should end up at CZK 243.1bn (2.8% of GDP) in 2026. Please consider these estimates strictly unofficial and preliminary. The information we are using is likely to go through revisions until the end of the year, and we are making several assumptions. Furthermore, since there will be an entirely new budget, the odds are that the gross and net borrowing requirements will change as well. Thus, consider this as only a starting point, not a definitive projection.

Fiscal policy to remain effectively unchanged

Unlike previous years, there are barely any major discretionary measures to speak of, reinforcing the impression that this budget bill is a placeholder. The biggest discretionary measure is the planned hike in public sector wages, which should reach 7.5% on average. We remind that at the time the budget bill was approved, there was no agreement between the government and unions, so the government went with its latest proposal. It offers a 9% wage hike for the lowest-paid positions, and 5% to everyone else. As a result, the increase is planned to cost CZK 20.8bn. There is some offloading of expenses to regional governments, which will cover the salaries of non-teaching staff at schools as of 2026. Yet, this is reflected through higher non-investment transfers to local governments, which the number above accounts for.

The other measure is conditional on approval from the European Commission, as it is related to the expansion of the Dukovany nuclear power plant. The government intends to spend CZK 18.3bn on that expansion in 2026, but if the EC doesn't approve the state aid scheme, that spending will not be made, and deficit targets will be reduced accordingly.

Finally, there is the final year of excise tax hikes on alcohol (10%) and tobacco (5%). Unlike previous years, the finance ministry did not outline the specific impact from the hike, though it noted that it expects consumption to decline further. All this makes us believe that the fiscal impact is negligible this time. There was no projection about the fiscal impact beyond 2025 when these hikes were introduced as part of the fiscal consolidation, and the finance ministry previously mentioned that any impact would be residual.

Defence and energy are the only sectors to see a spending hike

Changes to the state government budget plan are planned to be relatively small, even with the last-minute addition of CZK 28.4bn on both the revenue and expenditure side, which has been arbitrary. As a result, revenues are expected to rise by 1.8%, while spending should be higher by 3.5%. The relatively subdued revenue increase is due to lower inflows from EU funds and property income. We will cover EU funds in more details in the next section, but the main reason for lower inflows is less RRF funding. Meanwhile, tax revenue is expected to rise by 3.8%, driven almost entirely by social contributions, up 8.3%.

Meanwhile, the main spending items that will see growth in 2026 are capital investment, maintenance, social expenses, and the wage bill. We remind that as far as the wage bill is concerned, a part of it is reflected in transfers, which is why numbers don't match the fiscal impact of the 7.5% wage hike. Defence and energy are the sectors that will see the greatest increase in funding, as defence spending is expected to expand from 2% of GDP in 2025 to 2.35% of GDP in 2026. Most of the money will go for modernisation of military equipment, as there are some big projects in play, like the purchase of new tanks and armoured vehicles, among others. As far as energy is concerned, a big part of those expenses are conditional, as noted in the section on discretionary measures.

EU funds

Gross EU flows are expected to be visibly lower in 2026, down by 9.8%. Currency fluctuations will have a modest impact, though the fx-adjusted decline will be still considerable, at 8.3%. The main reason is lower RRF funding, which will decrease by 60.4%. This is mostly due to the progress of projects in the National Recovery and Resilience Plan, as RRF funding is entirely project-based. It will be partially mitigated by cohesion funding, which is expected to be higher by 22.2%, as more projects will proceed to a financing phase. This is not unusual, as member states always report a slow start to EU funds' absorption, and accelerate the pace as the MFF progresses.

There will be no major flows from other financial programmes, as this section is traditionally dominated by EU funding.

Conclusion

We consider this budget bill as largely inconsequential, an admittance on behalf of the ruling parties that they will likely go into opposition. In contrast, ANO prepared a budget that reflected its policy back in 2021, even though polls predicted it may lose that election. Yet, fatalism is the general feeling we get when looking at this bill, which is a sad end to this government, which came to power with some considerable ambitions. While a lot was achieved during this government's term regarding public finances, we may witness a great deal of that work going to naught, given the generous fiscal promises of ANO and its potential allies.

• Babis claims SPD doesn't want to be a part of the next government, which is not quite the case
• He hopes to get enough votes to be able to rule alone
• Babis reiterates direct support to Ukraine will decrease, but to the benefit of Czech healthcare and education
• He confirmed that ANO intends to rewrite the 2026 budget bill, but did not provide hints how the new budget would look

Andrej Babis, president of the leading opposition party ANO, would like to see a single-party ANO government in the next parliament, he told Mlada Fronta Dnes, a newspaper. He deflected questions about a potential alliance with the SPD, a nationalist party, saying only that ANO would like to receive a majority big enough to be able to rule alone. Babis did mention that the SPD did not really want to be part of the next government, which is not quite the case. The SPD has been constantly mentioning how they deserve a seat on the table, which would allow them to implement their policies. The party that is not that eager to enter the next government is rather the Motorists, who have stated they are ready to provide support in parliament only. In any case, Babis' goal is clearly to aim for a bigger vote share so that he has more leeway in forming a government. He tried to do the same after the 2017 general election, though unsuccessfully, so this is not a precedent.

Babis furthered that the Czech electoral system should be a majority one, like in the United States. He expressed regret how difficult it was to pass legislation in the Czech Republic, unlike the United States, where President Donald Trump has already passed close to 30 bills. We don't need to say this is quite the misleading statement, given that the Republican Party currently controls the entire Congress, which is the main reason Trump's legislative agenda is advancing, though there are still obstacles. The main thing is, Babis would love to be in a first-past-the-post system, where ANO, while not having an absolute majority, could be still in power.

Policy-wide, Babis remained evasive. Specific steps were discussed only in regard to foreign policy, where Babis intends to dial down support to Ukraine, and transfer current initiatives to NATO. He criticised the current government for using money to aid Ukrainian refugees that could be given to healthcare and education. This sounds vaguely familiar - ah, yes, some people once promised that the NHS would get a lot of money if there is no need to pay to the EU budget. Oh, well. Anyway, Babis softened previous views that Ukrainian refugees might see restrictions under an ANO government, as it appears to be going too far. Still, Babis was clear that after the war was over, only Ukrainians with jobs should stay in the Czech Republic.

Babis did confirm ANO's intent to rewrite the 2026 budget bill passed by the current government. Yet, he did not provide any hints what an ANO budget would look like, which falls into a pattern. He did suggest that funding for motorway construction will be severely reduced, to the benefit of healthcare and education, but nothing more than that.

• Fiala scored some points on foreign policy, where Babis sounded very unconvincing
• Yet, Babis did not make any blunders, which may be just enough for an election victory
• Fiala's good performance comes a little too late, given how dull Spolu's campaign has been so far

PM Petr Fiala (ODS, Spolu) came out as the clear winner after his debate with ANO leader Andrej Babis on Wednesday evening (Oct 1), hosted by CNN Prima News, a TV channel. Even media outlets who have always favoured Babis and ANO admitted that it was Fiala who came on top, though they commented negatively about Fiala's aggressive style. Indeed. Fiala was on the offensive the entire time, and he didn't leave any breathing space to Babis. As a result, Babis appeared tired, though he did not make any blunders. Still, Fiala created the impression that he is the more active one, though everyone appears to agree that this may have come a bit too late, given how dull Spolu's campaign has been thus far.

Fiala's biggest advantage was on foreign policy, where Babis stumbled a bit. Babis claimed that defence capabilities would have been acquired much cheaper under an ANO government, though it didn't sound convincing. Furthermore, he tried to mock some European armed forces, which hit the wrong tone, especially given the rising belligerence of Russia. Babis also claimed he had everyone's phone number, to which Fiala calmly replied that a phone number was not enough, as the other side needed to take you seriously. Fiala also had some advantage on domestic policy, pointing out that his government had worked towards stabilising public finances, like implementing a pension reform. Meanwhile, Babis only argued that pensioners did not like it, which is true, but he didn't really offer an alternative.

This went back and forth in a similar way, and we agree that Fiala was indeed the debate winner. Yet, we also agree that it may have been a little too late, and it is unlikely to be decisive in convincing voters to back the ruling parties. It may help bringing back some undecided voters who previously voted for Spolu, but at the end of the day, it will be likely not enough, as ANO's lead remains too big.

Fiala outmanoeuvred Babis. Also thanks to this that he did not answer questions and co-hosted the duel (Lidove Noviny)

Fiala insults half the nation, Babis says (Mlada Fronta Dnes)

Partitioning election millions. To whom will alliances not pay out? (Hospodarske Noviny)

An election victory of Babis will be the end of support to Ukraine, German media write (Lidove Noviny)

ANO, Stacilo! and SPD to become harder on NGOs (Pravo)

We will lower taxes on business and kickstart the economy, says former ANO minister Adam Vojtech (E15)

Together. EU meets in Copenhagen (Pravo)

Fog around incentives (Hospodarske Noviny)

Czechs' real estate frenzy is spilling over to investments. Developers are sensing an opportunity and setting up funds en masse (E15)

Israel intervenes against Gaza flotilla, participants complain about use of water canons (Mlada Fronta Dnes)

Question:

Thank you for the report. I had a question regarding your comment on Stacilo!'s performance. You mentioned that the party "has been steadily on a decline", but looking at the polls, the only one showing a recent decline is STEM. They were trending lower on NMS, but the latest reading shows a rebound, and in all the other polls (Median, Ipsos, Kantar), their numbers seem to be improving. Are you seeing any data suggesting a broader deterioration in support? Or is there a particular reason to place more weight on the STEM series? Thanks!

The question was asked in relation to the following story: ANO likely to lead the next government, but path to power may be thorny

Answer:

As far as the Kantar poll is concerned, its field work was Sep 1-19, so it covers mostly the first half of the month when its numbers match the rest. This mostly applies to Median, whose fieldwork is Sep 1-25, so the odds are the sample is shifted towards a period earlier than later in September. Besides, Median also shows a decline when compared to August (by 2pps), and the TV debates we refer to took place only in the past week or so.

This leaves NMS, about which we have some reservations. That pollster already admitted sample issues during the summer, and it tends to report big swings for some parties, up and down, without any plausible explanation. For example, it has Stacilo! at 8.2% in early August, then at 5.5% in early September, and then back at 7.3% in late September. The same goes for most other parties, as they have reported swings of 1-2pps in the past 3 weeks, which suggests their sampling methods are not the most reliable. It is why we are putting more weight on STEM, as their numbers have been very consistent, and they have had the entire year to refine their sample.

Maybe we are doubting NMS numbers too much, but at least in our experience, any pollster whose numbers swing too much is not reliable.

Question:

Thank you for this. Are you able to give some information on timings of When we will know results on Saturday and are there Friday exit polls? Are seat counts calculated immediately and are recounts prevalent? Also, how long may it be before we have a clear idea on next government? Thanks in advance!

The question was asked in relation to the following story: ANO likely to lead the next government, but path to power may be thorny

Answer:

Results will start showing up on Saturday afternoon, though ballot counting has been traditionally fast, so preliminary results will likely be available some time on Saturday evening, including seat distribution. To compare with the previous election, a sample of 98.67% of polling stations was available, though seat distribution was preliminary. Final results were then published some time on Sunday (we don't recall the exact time, though). Recounts rarely happen, so this has never been an issue. There are no exit polls available on Friday. These can be published only after the election day is over on Saturday, so after 14:00 CET.

As far as the next government is concerned, it is a question that is not that easy to answer. It will depend largely on election results, as well as on political will to reach an agreement quickly. If ANO does better than currently expected, then the odds are a government will be formed faster. If not, talks may last for a couple of months. If there is no clear way to establish a majority this time around, talks will likely stall. As we have pointed out, there is no formal deadline to appoint a new prime minister, and there have been elections where it has been months before a permanent government is installed. The most recent example is the 2017 election, which took place on Oct 20-21, while a coalition agreement signed on Jun 15, 2018.

On the other hand, it could take much shorter than that, as it happened at the previous general election in 2021. The current ruling coalition took about a month to negotiate, as it was clear they could establish an absolute majority with the seats they had. Talks started immediately after final results were available on Oct 10, 2011 (the election took place on Oct 8-9), and the coalition agreement was signed on Nov 8.

• The budget saw a CZK 11.5bn surplus in September, reversing from a CZK 6bn deficit a year ago
• Corporate taxes were the main boost to revenue growth, with both corporate income tax and windfall tax outperforming
• EU flows are still at 56% of the annual plan, but an RRF payment of EUR 1.6bn is coming soon
• Spending growth remains contained, the biggest increase comes from capital spending
• The government has stepped up on motorway construction and flood repairs in H2 2025
• FinMin Stanjura expects that the CZK 241bn will be met, and we support his assessment
• It makes it more likely that expanded debt issuance in October is to hedge against political risk

The state government budget reported a deficit of CZK 153.9bn (1.8% of GDP) in January-September, lower by 15.3% y/y, according to figures from the finance ministry. In September alone, the budget reported a second consecutive surplus, at CZK 11.5bn, reversing from a CZK 6bn deficit a year earlier. FinMin Zbynek Stanjura attributed the better performance to a strong intake of corporate taxes, considering that both corporate income tax and windfall tax have performed above expectations. He furthered that spending is expected to increase at a somewhat faster pace, reflecting planned public investment in the second half of the year. However, Stanjura is confident that this year's deficit target, at CZK 241bn, will be met.

Data Download

There is reason to believe Stanjura's claim, as tax collection has been indeed steady, rising by 9.1% y/y in January-September, being the main driver of revenue growth, which reached 7.8% y/y. Tax collection was at 75% of the annual projection, though this is not fully indicative, as tax revenues are not spread equally throughout the year. Yet, the only tax that has been lagging a bit is VAT, with revenue rising by 8.2% y/y, though fully compensated by a major intake increase from corporate income tax (up 16.5% y/y) and windfall tax (up 20.9% y/y). At this point, corporate income tax revenue is at 83.2% of the annual projection, while windfall tax revenue is at 97.9%, so both will certainly outperform this year. We remind that this is the last year when windfall tax is collected, and it is due at the end of each quarter, so the last instalment will be seen in December. Everywhere else, tax collection was solid, with social contribution flows rising by 7.2% y/y, while personal income tax flows - by 12.2% y/y.

Non-tax revenues were still lower by 1.3% y/y, but this is mostly due to these flows being even more uneven than tax collection. This applies particularly to EU flows, which were lower by 1.2% y/y, and at 56.1% of the annual plan. However, this will soon change, as the European Commission approved the next RRF payment of EUR 1.57bn last week, which is worth roughly CZK 38bn. Thus, if only the RRF payment is added, EU flows will reach about 78% of the annual plan, not accounting for any other EU flows. We also remind that there is a base effect in play, as the final payments from the 2014-2020 MFF were made in 2024, and from now on, only payments from the 2021-2027 MFF are planned. There is also a base effect related to property income, as CEZ paid a lower dividend this time, after energy prices started normalising in 2024, and the company's profits narrowed, respectively.

On the expenditure side, spending rose by 5.2% y/y in January-September, driven by a boost in capital spending (up 29.1% y/y) and transfers (up 4.4% y/y). Capital spending was higher due to an advancement in public infrastructure projects, which accounted for almost the entire year-on-year increase. These include new motorways, as well as repairs from last year's heavy floods. Transfers increased mostly due to higher education subsidies, which were delivered early in the year and boosted the spending side disproportionately back then. The other big spending items were social expenses (up 2% y/y), interest (up 12.1% y/y), and personnel (up 5.6% y/y). We remind that not the entire public sector wage bill is included in the personnel item, as most healthcare and education institutions are managed at local government level, so any wage expenses there are included in transfers.

Overall, we tend to agree with FinMin Stanjura that budget performance has been favourable, and that the CZK 241bn deficit target will likely be achieved. We don't expect plenty of a safety cushion, however, though there shouldn't be much strain on the spending side, either. This makes it more likely that the finance ministry expanded debt issuance in October mostly due to political risk, as the odds are that the likelihood of an ANO-SPD government may inflate borrowing costs.

• ANO has been losing some support, but ending up first is beyond a doubt
• Yet, it will likely need an alliance with the SPD to be close to an absolute majority
• Voters have mostly settled, as the combined support for ANO-SPD and Spolu-STAN has been stable in September
• Liberal voters have been flocking towards the Pirates-Greens, but not in numbers that will matter
• Stacilo! and the Motorists are not completely certain to make it past the 5% threshold, but we expect at least one of them will
• Political division has grown, so odds of a grand coalition are very slim
• The current ruling parties lack potential allies outside the Pirates-Greens, so they will likely go into opposition
• An ANO-SPD government will likely be much less fiscally responsible, and more interventionist
• ANO's key promises are to roll back pension reform and subsidise energy prices, none of which it can afford to abandon
• Support for Ukraine will wind down considerably, as well as support for Ukrainian refugees
• We expect a rating outlook downgrade at the very least after the new government reveals the 2026 budget, which it intends to rewrite

ANO is set to return to power after 4 years in opposition, as its lead is unlikely to melt in the days remaining to the general election on Oct 3-4. While the party will almost certainly end up first, its path to power may be much thornier than ANO's leadership initially hoped for. This election will likely produce the most fragmented Czech parliament in decades, and ANO will need to make some hard choices. An alliance with the SPD-led nationalist alliance appears to be the main path to a new government, as the SPD will demand a place on the table, a first for a party on the political fringe in the Czech Republic. Yet, ANO's desire to return to power has been considerable, so this will likely not be a major obstacle.

This election has also provoked a considerable division along ideological lines, very similar to what we have been seeing in the United States, so going across the aisle will be much more difficult than before. While the Czech Republic has seen a fair share of coalitions, there is no grand coalition culture as in Germany, so the odds that any of the current ruling parties may back ANO and its potential allies are slim. Furthermore, there has been a lot more populism than before, with generous election promises to back it, which may lead to a major shift in fiscal policy not seen soon. The Czech Republic has been on a fiscal consolidation path under the current government, but that will likely end soon, as neither ANO nor likely allies care for it any more.

Recent polling puts ANO's victory beyond any doubt, but it may end up with fewer seats than it currently has

Polling in the month immediately before the election tends to be the most reliable. It is even more the case here, as July and August are traditionally summer holiday periods, and survey respondents tend to be less reliable in those times. Yet, numbers have not been as consistent as we hoped for, and we have some doubts about some of the most recent polls. There is no more polling data coming out, as the blackout on publication of opinion polls starts on Oct 1. Exit polling will be available after the end of the election day on Oct 4 (Saturday), at 14:00 CET. Vote counting is usually very fast, so we expect results with a sample close to 100% some time on Sunday.

September polling has not been that good to ANO, which has been losing momentum, likely due to the recent activation of liberal voters. As a result, ANO has been polling at around or just under 30%, while it has been consistently in the 31-33% range in the months before. There is an important note to make here, however. Most of the variation in ANO's polling comes in direct correlation to the results for the SPD-led nationalist coalition. Thus, any ANO losses typically correspond to SPD gains, and vice versa. The combined vote for the two parties remains at about 42-43%, and it has not varied much (except a single survey, which is clearly an outlier).

We have also seen something similar with the voters of the current government parties, namely Spolu and STAN, where the combined vote has been stable at 31-32%. The recent activation of liberal voters has been mostly to the benefit of the Pirates-Greens alliance, which is now polling around 10%, up from 7-8% in June-August. There are plenty of voters disappointed with the government that have switched to the Pirates, who left this government last September due to internal disagreements. While some tension between the Pirates and the rest lingers, all parties listed have declared willingness to work together again. The big unknown here is whether Spolu will be able to convince hesitating voters to back them again. The odds of that are not high, but it is not entirely impossible. Our expectations are not high, however, as Spolu's campaign has not been inspired enough to inspire voters.

The big unknown is related to the leftist Stacilo! alliance and the Motorists, a populist party on the right, very similar to the US MAGA movement. Stacilo! has been steadily on a decline, and its debate performance has been largely the reason, as Stacilo! candidates behaved much more as Czechoslovak party officials than modern Czech politicians. Yet, some recent polling gives them a guaranteed entry in the next parliament, which we find a bit odd. The same goes for the Motorists, who are guaranteed entry by some pollsters, and are close to the 5% threshold according to others. This is where numbers have been the most inconsistent, so we are largely making a judgment call. We believe that the Motorists have slightly greater odds to make it past the threshold, while Stacilo!'s decline will likely continue. A breakdown by constituencies shows that Stacilo! is not really capitalising on the alliance, and the performance of the two main parties in it, the KSCM and SOCDEM, was better in 2021 than it is now combined. Still, this is the main source of uncertainty in this election, so we don't rule out any combinations, as far as these two are concerned.

ANO's most reliable path to a new government is through an SPD alliance

Regarding post-election scenarios, the next parliament promises to be the most fragmented one in modern Czech history, with up to 7 formations and up to 15 separate parties. We remind that there is one formal coalition, Spolu, which consists of the ODS, TOP 09, and the KDU-CSL, and three informal ones, the SPD-led one, the Pirates-Greens, and Stacilo! Setting a precedent in a Czech election, three of these alliances used a single party registration to take part in the election, thus circumventing the higher electoral thresholds for coalitions. Thus, the SPD-led alliance also includes Tricolours, PRO 2022, and Svobodni; the Pirates include Greens candidates on their ticket; and Stacilo! is an alliance of four parties, namely the KSCM, SOCDEM, the CSNS, and the SD-SN. Informal coalitions were challenged in court, but the Constitutional Court ruled that the letter of the law was observed, so these formations were allowed to take part in the election.

ANO's victory is beyond much doubt, but it cannot get close to a majority without the SPD

In any case, this has led to a situation where ANO, while almost certainly likely to win the election, may end up with slightly fewer seats than it currently has. The fewer formations make it past the 5% threshold, the easier it will be for ANO, but given recent polling, we expect that there will be at least 6 formations. Thus, ANO will likely have somewhere around 65-70 out of 200 seats, putting it very far from a single-party minority government, even though it is apparently what voters want. Meanwhile, an alliance with the SPD will bring them to about 95 seats, making it much easier to obtain the 101 votes that grant an absolute majority.

A grand coalition is not impossible, but it will require leadership change at Spolu

The big question is whether a grand coalition is possible in this environment. Our take is that the odds of that are very low. The campaign has been quite divisive, and division lines have become stronger than anything seen for some time. It has also impacted voters, as a grand coalition between ANO and Spolu, or the ODS in particular, is far less popular than even an ANO-SPD government. Voters are unwilling to forget the massive increase in costs of living seen under the current government, reflecting the tailgate of the Covid-19 pandemic and the energy crisis from 2022-2023. Meanwhile, ANO's ambivalent stance on Russia and the war in Ukraine is drawing thick red lines on any post-election co-operation.

We don't completely discard this scenario, but it will require a leadership change at Spolu parties. ANO and Spolu parties have been co-operating at local government level, and there are factions that would not mind a nationwide alliance. However, none of these factions are currently in power, and none are close to taking over. Thus, while it may be theoretically possible to assemble an ANO-ODS or ANO-Spolu government, we consider the chances for that as low. If there are post-election developments that remove the current red lines on ANO-Spolu co-operation, our assessment will change. However, it is not our baseline scenario, and it doesn't appear to become one any time soon.

The odds of the current government to remain in power remain very slim

Regarding the current ruling coalition, its chances to remain in power are very slim. The main reason is that the only potential partner not currently in the government is the Pirates-Greens alliance. Yet, the maths doesn't quite pan out, and it will require some remarkable last-minute push to get enough voters to repeat the current government. The SPD, Stacilo! and the Motorists are all considered to be on the political fringe, and they have much more to lose from backing the current ruling parties than remain in opposition. Meanwhile, ANO's verge into populism has made it much more accommodating, as it doesn't have that much ideological purity to defend.

We consider an ANO-SPD minority government backed by the Motorists as our base scenario

We consider a minority government of ANO and the SPD, backed by the Motorists, as our base scenario. The Motorists have said they don't necessarily need to be part of the next government, but would support an ANO-led government due to common policy goals. The option that includes Stacilo! rather than the Motorists is less likely, mostly because of the communists (i.e. the KSCM), who appear to have achieved the feat of becoming a less desired partner than even the SPD. We don't rule out Stacilo! breaking apart, and some of its constituent parties backing an ANO government, but there is no precise way to project how many seats each party will have, so we are not entertaining that option.

You will notice that we are not using percentage odds in post-election scenarios, and the reason for that is we find them too arbitrary. Instead, we prefer to provide a general assessment of how likely each scenario is, which provides a better idea of how things are likely to go. Furthermore, since we are not absolutely certain whether Stacilo!, the Motorists or both will make it to the next parliament, it also helps not to use numerical probabilities.

Government formation likely to take a long time

Regarding the procedure of government formation, it will likely take a long time, given the likely fragmentation of the next parliament. There are very few deadlines, which could stretch the process for some time. A parliament gets three attempts to form a government, after which it can be disbanded and a repeat election called. During the first two attempts, the president is the one to name a prime minister candidate, and there is full discretion in that choice. In fact, a prime minister candidate doesn't even need to be an MP, as was the case with Jiri Rusnok, who took over as a sort of caretaker PM in late 2012 until the 2013 election. If a third (and final) attempt is required, then the lower house speaker names the PM candidate.

President Petr Pavel has been setting some conditions already, like not naming people who want the Czech Republic to leave the EU and NATO to the next government. Yet, we doubt Pavel will disregard election results, so the odds are ANO leader Andrej Babis, or his right hand, Karel Havlicek, to be the next PM. However, we expect Pavel to take his time, mostly because of how government formation works. Namely, once a prime minister is appointed by the president, they take over the executive immediately, even before they have sought a vote of confidence. Seeking a vote of confidence in the lower house is the only step that has a deadline, and it has to take place within 30 days of the new government's appointment. The important detail is that even if that government doesn't receive a vote of confidence, it remains in power until a new one is appointed.

Thus, we expect that Pavel will be very careful when appointing a new government, as it may remain in power for quite a long time. Milos Zeman created a precedent in 2018, when he first appointed Andrej Babis as PM, but Babis failed to obtain confidence. Then, Zeman waited for 6 months before he appointed Babis a second time, after which Babis managed to get enough votes and continued as a permanent PM. We don't expect the process to stretch that long this time, but we expect that Pavel will require that the next PM should have already secured the votes for a vote of confidence, and this may take some time.

In theory, Pavel could also appoint Petr Fiala as PM again, and then delay the next PM appointment. However, this will be considered a major abuse of power, and will kill any re-election chances Pavel may have. When Zeman delayed the second appointment of Babis in 2018, he was already in his second term, so he didn't really care for re-election. Otherwise, we doubt Zeman would have dared being so crass with the procedure. Thus, it will depend entirely on Babis how long it will take before he can become PM again, which will require talks with potential partners, most of all the SPD.

An ANO-SPD government is likely to cause massive fiscal expansion and debt-funded spending

In conclusion, we will ponder a bit on how government policy will be shaped under an ANO-SPD rule. Unfortunately, party manifestos have been quite vague this time, and there were few detailed promises. Still, there is a general idea of what policies ANO and the SPD will pursue. To start, fiscal policy will likely loosen visibly, though possibly not as much as seen in Poland. Both ANO leader Babis and his right hand Havlicek have said that the new government must invest much more in the economy, as insufficient growth was one of the main current risks. It means a much greater presence of the state, likely funded by more debt.

There are also some major promises with fiscal implications that ANO has made, which will lead to fiscal deterioration. We will summarise the more consequential ones below:

• Rollback of this government's pension reform. The currently projected savings are 1.5% of GDP annually, so these will never take place. Technically, there will be no immediate fiscal impact, as the retirement age is currently at 65 years, and it will not change when pension reform is rolled back. However, there will be likely some impact from a likely faster pension indexation, which ANO has also promised, but has not provided details how it will achieve it;
• A 2pp cut in corporate income tax, back to 19%. The higher tax rate has been in force since 2025, and it is projected to bring about CZK 30bn;
• Subsidised energy prices, at least for households. ANO projects the fiscal cost at CZK 50bn annually, and it plans to pay for it through diverting investment in energy infrastructure. However, a great deal of that requires EU approval, as it affects projects with EU funding;
• Recovery of social benefits taken away by the current government, an increase in parental allowances. The latter may have more than a fiscal impact, as it will likely push away women from the labour force once more.

ANO is unlikely to renege on rolling back pension reform and subsidised energy prices

Pension reform and subsidised energy prices have been the cornerstone of ANO's manifesto, and we don't believe they are promises ANO will renege on. Rolling back pension reform is particularly important, as a great deal of ANO's voters are now retired people, so it will hit the party disproportionately if it doesn't make good on that promise. Energy prices are instrumental as well, as they are one of the strongest reasons why so many voters have been disappointed with the current government. Promising lower energy prices and not delivering is a certain way to end a government's term short, and ANO realises that well. The ways to pay for these promises have been vague, and rely mostly on stronger economic growth and better tax collection, things notoriously difficult to achieve.

New government likely to be more Eurosceptic, and less friendly to Ukraine

As far as foreign policy is concerned, an ANO-SPD government will be much more Eurosceptic, and much less friendly towards Ukraine. As far as the EU is concerned, the SPD wants the Czech Republic to leave, but we doubt ANO will help with that goal in any way. The greatest extent ANO has agreed to co-operate is to pass a referendum law. However, Babis has clearly stated he sees the Czech Republic's future in the EU, even though through a different approach. Where Czech disruption will be seen more visibly is towards environmental policies, and policies that aim at greater integration. For example, an ANO-SPD government will certainly oppose any attempts to reduce member state veto powers. It will also oppose policies like the Migration Pact, the Green Deal, and the introduction of the ETS2.

Regarding Ukraine, you should expect a much less friendly attitude. The munitions initiative will end, and Babis has said he would rather have NATO co-ordinate it. Arms deliveries to Ukraine will likely cease, as the SPD is particularly hostile to those. Finally, Ukrainian refugees will likely see their access to the Czech labour market denied, and state support curtailed. This comes at a time when Ukrainian refugees have already been net contributors to the Czech budget, and they even recouped all initial state support they have received in Q2 2025, according to a labour ministry report. It doesn't matter much to the SPD, however, whose leader Tomio Okamura even blamed Ukrainian refugees for rising property prices and difficult access to housing.

We expect at least a rating outlook downgrade after the new 2026 budget is announced early next year

As a result, fiscal deficits will likely balloon, even if ANO has formally committed to respect SGP requirements, so fiscal deficits within 3% of GDP. We expect that the escape clause will be abused with, to hide additional spending as related to defence. Yet, even this may not be enough, so we expect a downgrade of the credit rating outlook at the very least, after the new 2026 budget is revealed. Speaking of budgets, ANO intends to rewrite the 2026 budget bill from scratch, and expects to have the new budget in late February 2026. If fiscal policy proves irresponsible, then we don't rule out a scenario where the Czech Republic loses its AA- credit rating. This will require some time, as general government debt remains relatively low for the AA rating group, likely to be around 44% of GDP at end-2025.

• Loss narrows y/y due to slimmer net interest loss
• Equity shortfall widens further to HUF 1,833.4bn at end-H1

The National Bank of Hungary (NBH) posted a HUF 248bn loss in H1, according to its half-year report, the news portal Portfolio reported. The negative result represented some improvement compared to the HUF 386.2bn loss in the corresponding period of the previous year, but this was the eighth consecutive quarter in the red for the NBH. The y/y decline in the NBH loss was on account of net interest income, which generated a HUF 257.4bn loss, narrowing by 40.9% y/y. The rate cut cycle up till Q4/2024 probably supported the shrinking loss, we believe. The positive impact from the shrinking net interest loss was partly offset by weaker y/y gains from revaluation of the forex reserves, which reached HUF 43.2bn in H1, somewhat suppressed by the strength of the forint since the start of the year. The average exchange rate of the forex reserves was EUR/HUF 377, according to the NBH report, so it will realise an exchange rate gain as long as the forint is weaker than this level. The loss widened the negative equity of the NBH further to HUF 1,833.4bn as if end-H1. According to the previous legislation, the government had to re-capitalise the NBH, but it was amended in 2023 in effect postponing the recapitalisation requirement on the budget. The law amendment did not impose a specific time period, in which the NBH should be recapitalised, so we expect that the government would avoid such costs given the narrow budgetary headroom.

• Hungary to receive total of 4bcm from Engie during 2028-2038

State-owned energy group MVM signed a long-term LNG purchase contract with French Engie, foreign minister Peter Szijjarto announced. The contract involved the supply of 4bcm of LNG during the 2028-2038 period, or 400mcm annually, he said. This was the longest LNG purchase contract in Hungary's history, he pointed out. Hungary recently also secured 2bcm of gas supplies from Shell for a ten-year period as of 2026, we note. The new gas supply contracts aimed to foster energy diversification without aiming to replace existing sources of supply, Szijjarto had said when announcing the Shell contract.

Hungary's annual gas consumption amounts to around 9-10bcm of gas per year, while domestic gas extraction is around 1.9bcm, so the new gas supply contracts account for only a small fraction of local demand, we think. They would not be sufficient to replace the long-term gas supply contract with Russia, which entitles Hungary to 4.5bcm of gas deliveries per year. Hungary's gas supply security has come under threat by the EC and US efforts to require EU member states to completely separate from Russian gas. A related threat appeared from Bulgaria's intention to halt Russian gas transit through its territory, which includes Hungary's main gas supply route - the Balkan Stream pipeline.

• Outcome of re-negotiation depends on government's job protection plan
• Trade unions expect tenser discussions on minimum wage for skilled workers, insist on double-digit hike in 2026

Trade unions and employer associations have agreed to reach an agreement on the minimum wage for 2026 by mid-November, trade union leader Melinda Meszaros said for the business daily Vilaggazdasag after yesterday's bilateral meetings of social partners with the government. We note that the social partners had signed a three-year wage agreement last year, which envisaged the minimum wage to be hiked by 13% as of 2026 and by 14% as of 2027. The macroeconomic parameters - GDP and inflation, diverged from the assumptions significantly, prompting the ongoing re-negotiation of the stipulated 2026 hike as per a clause in the wage agreement, we note. Trade unions believed that the wage agreement could remain in force, but they were still open to discussions, Meszaros indicated. The outcome of the re-negotiation will depend on the government's upcoming job and industrial protection plan, which should be unveiled around mid-October, she added. Possible measures included a 1pp reduction of the social contribution rate and other smaller tax cuts like raising the VAT threshold or the thresholds for the small business tax.

Trade unions did not expect significant conflicts regarding the re-negotiation of the headline minimum wage, but rather about the minimum wage for skilled workers, Meszaros underlined. The existing three-year wage agreement did not cover the minimum wage for skilled workers, which was left to be determined separately each year, we note. Trade unions will still exist the minimum wage for skilled workers to be raised by at least 10% in 2026, Meszaros stated. Talks on the skilled worker wage with employers could be more tense because the market was more sensitive to it, she explained.

The minimum wage was raised by 9% to HUF 290,800, while the minimum wage for skilled workers was raised by 7% to HUF 348,800 as of the beginning of 2025. The minimum wage for skilled workers is relatively more important for the labour market since it covers around 750,000 people compared to around 250,000 people earning the headline minimum wage, according to earlier figures from the government.

PM Viktor Orban: It was particularly exciting European summit (Magyar Nemzet)

Exemption from personal income tax instead of Tisza tax - from today the life of every mother of three children will change (Magyar Nemzet)

Even in Budapest, people are no longer interested in Peter Magyar and Tisza Party (Magyar Nemzet)

Home Start programme: expectations are confirmed, sellers have also entered the market (Magyar Nemzet)

Minimum wage negotiations are accelerating: It has been revealed when agreement can be reached (Vilaggazdasag)

Leaked: PM Viktor Orban prevents Brussels from using dirty trick to admit Ukraine to EU at EU summit (Vilaggazdasag)

State debt manager AKK: 84.4% of issuance plan is fulfilled by end-Q3 (Vilaggazdasag)

Hungarian businesses can breathe sigh of relief - economy minister Marton Nagy has put tax reduction package on table (Vilaggazdasag)

PM Viktor Orban announces pension adjustment, but there are some problems with it (Heti Vilaggazdasag)

PM Viktor Orban is left alone in Copenhagen with his anti-Ukrainian veto (Heti Vilaggazdasag)

Extension of state of emergency must be discussed at extraordinary meeting on Tuesday (Heti Vilaggazdasag)

Government is attacking idea of wealth tax because "almost all ministers and their family members will be affected by it", according to opposition leader Peter Magyar (Heti Vilaggazdasag)

PM Viktor Orban: If something flies into Hungary that does not belong to us, we will shoot it down (Heti Vilaggazdasag)

PM Viktor Orban welcomes Angela Merkel at government headquarters (Heti Vilaggazdasag)

• Debt agency says net issuance hits HUF 5,309bn at end-Sep vs. original target of HUF 4,626bn

The State Debt Management Agency (AKK) said Wed. that it topped at end-September its net issuance target of HUF 4,626bn by issuing HUF 5,309bn in debt, according to a statement. It said the AKK 683bn overshoot would be used to cover maturities falling due during the remainder of the year. Contributions to net financing were almost equal in the case of HUF and FX institutional instruments, the AKK said. The domestic total was HUF 2,750bn while the FX amount was HUF 2,781bn. In terms of gross issuance, it said the end-September total was 84.5% of the target of HUF 19,526bn at HUF 16,487bn.

In the domestic HUF breakdown, the AKK noted that in the case of institutional HUF bonds some 76.7% of planned gross issuance was completed by end-September, as was 83.7% of the planned yearly gross issuance of short-term discount Treasury bills (which the AKK uses to mostly serve liquidity management purposes). In case of HUF loans, the contribution to net financing was positive and amounted to HUF 40bn against the planned negative contribution in the amount of HUF 35bn.

In terms of demand, it totaled HUF 4,815bn for bonds at end-September, compared with an offered amount of HUF 1,622bn. The AKK accepted demand worth HUF 2,554bn, implying a bid-to-cover ratio of 1.89. Including non-competitive sales, the AKK issued institutional securities worth HUF 2,908bn.

For FX, the AKK noted that 165.1% of the planned HUF 1,685bn net financing plan was completed in case of FX bonds and FX loans at end-September. Long-term international bond auctions contributed the majority of the HUF 2,781bn net issuance to the tune of HUF 2,608bn. FX loans contributed another HUF 177bn. Regarding gross issuance, of the HUF 3,083bn planned full-year gross international issuance target, some HUF 3,057bn was completed by end-September, implying a completion rate close to 100%.

For international bond issuance, the completion rate exceeded 100%, the AKK said. International bond issuance reached HUF 2,699bn, topping the HUF 2,636bn target. The AKK added that it issued bonds in three different currencies with multiple times oversubscription. Following its EUR 2.5bn issuance in January, it issued USD 4bn in June, and then EUR 595mn in so-called Panda bonds in July. It added that the Panda bond issuance was the largest and longest maturity sovereign issuance on the Chinese onshore market. The AKK noted that in addition to smaller sized bonds denominated in JPY and CNY a EUR 1bn will mature in the autumn, meaning FX debt relative to total debt will be close to the 30% benchmark. Some 99% of FX debt was still denominated in EUR, it noted.

• Household lending growth remains fast at 11.4% y/y, corporate lending is slower at 3.4%

The outstanding stock of bank loans to the private sector rose by 7.2% y/y as of end-August, according to data released Wed. by the National Bank of Hungary (NBH). Lending growth eased slightly from 7.3% the month before, but it remains slightly faster than the closer to 6% growth seen earlier this year. Household borrowing continued to drive the increase on growth of 11.4% y/y, which was even with that seen the prior month and comes due to continued strong income rises. Corporate lending ticked down to 3.5% y/y from 3.4% the month before and defying some expectations growth would continue to accelerate. It can still be expected that lending to non-financial companies will be moderate due to the sluggish economy and high uncertainty.

That is especially so since real, transaction-based corporate lending continued to fall, the decline widening to -0.7% in August from -0.4% in July. In terms of households, real, transaction based lending remained fast at 7.1% y/y in August, though that was down slightly from 7.2% the month before.

Overall, corporate lending growth remains capped by the slow economy whereas household growth is being supported by government stimulus as well as decent real income growth. Further lending growth should be expected in housing especially since the House Start program was launched in September and is said to be seeing high demand.

Data Download

Data Download

• General govt surplus is 2.2% of GDP after Q2
• Revenues surge by 11.8% y/y in Q2, spending rises much slower 1.2%
• General govt deficit revised up to 5.0% of GDP for 2024

Hungary's general government balance swung to a surplus of HUF 480.0mn in Q2 from a deficit of HUF 469.1mn the year before, according to ESA-compliant data published Wed. by the stats office KSH. The surplus amounted to 2.2% of GDP after Q2, the KSH said, though it added that in H1 2025 the deficit amounted to 0.7% of GDP factoring in the revised deficit of HUF 789.9mn in Q1.

Revenue growth accelerated to 11.8% y/y in Q2 from a revised 8.1% the quarter before. In particular, income and wealth tax receipts as well as VAT income flowed in despite the fact that economic growth remains muted and most likely tied to the extension of windfall taxes, the automatic indexation of some excise taxes, and still high wage growth.

Spending increased by a much slower 1.2% y/y in Q2, slowing from 3.9% the quarter before. Spending was lifted by a big rise in payroll costs due to the minimum wage hike and the raise of teacher wages.

As part of the coming Eurostat autumn debt and deficit notification, the KSH said it revised up the 2024 general government deficit to 5.0% of GDP. The first notification last April put the deficit at 4.9% of GDP. General government debt stood at 73.5% of GDP, it added on a total of HUF 59,879bn. To note, the general government deficit thus remains well above the 4.5% of GDP target that had been set for 2024, though it was down from 6.8% of GDP in 2023 (revised up from 6.7%), 6.2% in 2022 (unchanged from April), and 7.1% in 2021 (unchanged).

Overall, the Finance Ministry forecast a deficit of 3.7% of GDP in the April debt and deficit notification, but this has since been revised up to 4.5% of GDP and that will mean only very slight improvement compared with 2024. The NBH recently forecast that the deficit would be 4.1-4.5% of GDP, and so marking some improvement. Further deficit reduction is planned for 2026, with the NBH seeing 3.8-4.2% of GDP, though it remains to be seen how much the government will feel it needs to add stimulus in order to stave off electoral disaster.

• New orders mount in September, helping boost production

Hungary's PMI rose 2.4pts m/m to 51.5pts in September from a revised 49.1pts in August, returning to plus territory, the logistics association Halpim reported Wed. Companies reported a moderate expansion in the manufacturing sector, though September is considered a below-average month (long-term average since 1995 is 52.6) and the current seasonally adjusted index is the 12th lowest ever.

Data Download

New orders helped lead the way with a 5.2-pt increase in September. Halpim noted that a bigger increase came only in the finished goods stock index, though that might be a worse sign. Production itself rose 1.8pts m/m, to follow.

Halpim also noted that the purchase volume index increased 3.9pts m/m, indicating a solid increase in the volume of purchases. The purchase price index, however, fell by 1.8pts m/m, indicating a slight decrease in prices. Delivery lead times increased by 5.1pts m/m while the level of purchased inventories increased 3.5pts.

Overall, the rise in the PMI bodes well for the economy going into the autumn and Q4. As noted by Halpim, manufacturers largely had a difficult summer, but perhaps there is more optimism and the economy will receive a boost. Auto and other manufacturing capacity is increasingly going to come on stream and the broader EU-wide defense push should help industry as well. The government is likewise launching stimulus packages ahead of next year's elections, which should help bolster domestic demand. In its latest forecasts, the NBH forecast that GDP growth would remain soft in 2025 at 0.6%, but then recover to 2.8% next year.

What did Russia's GRU bring to Poland? [front-page story on investigation into RU spies preparing acts or terror using drones and explosives; warning is about potential RU-instigated terror attacks] (Gazeta Wyborcza)

Poles are fed up with Russian provocations [77% of Poles believe Russian aircraft should be shot down if they violate PL airspace; only 17% said they shouldn't] (Rzeczpospolita)

Breath of optimism - PMI signals Polish industry is slowing emerging from its slump (Rzeczpospolita)

The end of high prices, so announces PM Tusk [editorial about the fact the inflation pace might be down, but price levels remain highs] (Rzeczpospolita)

So many succumbed to illusion of Polska 2050 [political scientist notes that party is falling apart] (Gazeta Wyborcza)

Govt won't let you smoke a joint [PM Tusk talked of perhaps some liberalisation of marijuana laws during 2023 election campaign, but govt has no plans to go further this term] (Rzeczpospolita)

Only way to save JSW is to amend the Mining Act (Rzeczpospolita)

Question:

Is there an English version available of the 2026-28 debt management strategy? Could you also comment on what the main changes/points are in the government's updated debt management strategy that we should be aware of? Is there any comment within the document on potential Euro/Dollar bond issuance and expected size for 2025-28?

The question was asked in relation to the following story: Borrowing coverage hits 100% for 2025 - FinMin

Answer:

The English version isn't published yet. When it is, it will be published here: https://www.gov.pl/web/finance/debt-management-strategies. I usually go off the Polish version and so am not sure how quickly they publish it, though I imagine it will be fairly soon.

I am just finishing my story, but the main takeaway is that the government now expects the adjusted public debt measure used to discern whether the public debt safety thresholds are crossed shows them being crossed in 2028, and nearly in 2027. That would trigger a forced fiscal consolidation program that would be painful indeed. The question is what doe the FinMin/govt do with this forecast? It might just hold off and that would make the next general election -- due in autumn 2027 -- very much about fiscal plans.

There are no comments on euro or dollar issuance plans for the coming years. The latest update for the total in PLN of gross foreign issuance this year is PLN 56.2bn from the 2026 budget details. That compares with the PLN 47.7bn raised already. This would suggest slight more issuance to come this year. The gross foreign issuance plan for 2026 is PLN 48.6bn, so in fact slightly lower than this year.

Question:

The PLN 255bn figure suggests, as you point out, that there would be potentially a huge amount of funding supplied in 2026. Could you share how likely you think this is, what this hinges on and potentially where it would be deployed?

The question was asked in relation to the following story: Ministry now expects next RRF tranche of PLN 26bn by end-November

Answer:

One addition to this story is that the government is moving to reduce the RRF loan total by PLN 21.7bn and that will help reduce financing needs because for the loan part of the RRF program, it has to take out loans that it then pays back when it receives the tranches from the EU, which come with a delay. This could mean the de facto gross financing total is below the PLN 690bn and perhaps by the full PLN 22bn or so.

The government usually pre-finances 20-40% of its next year's financing target in the previous year and so I think the pre-financing total will be at least 25-35%. I'm not sure if it will be higher, though, since that would mean fairly heavy issuance. But I'm also not sure about the FinMin's thinking. If, for instance, the FinMin is actually scared of a sovereign rating downgrade, say, next year, perhaps it will want to borrow more this year. We shall see.

In the financing plans for 2026 (which you can see at the bottom of the story here), the FinMin sees some PLN 462.7bn in gross domestic financing (PLN 323.4bn for bonds, PLN 58.1bn for T-bills, and PLN 81.2bn for savings bonds) and PLN 48.6bn in T-bond issuance abroad. That marks the brunt of the financing. There are loans as well.

In the end, it looks like the FinMin will target about PLN 20bn more in T-bonds, but PLN 30bn more in T-bills, suggesting more action on the short end. The savings bond total is to rise some PLN 10bn, so that is important too.

Question:

What are your expectations for when the electricity price cap might be removed?

The question was asked in relation to the following story: President signs into law extension of power price cap through Q4

Answer:

I think that the government does not want to have a power price cap for households for 2026, and so it could be removed at the end of the year. The finance minister and the energy minister have both said in recent weeks [our story here] that the wholesale power prices on the Polish Energy Exchange (TGE) are low enough that a cap shouldn't be needed. The new head of the Energy Regulatory Office (URE) said more recently [story here] that though the power tariff itself could fall for 2026, the power distribution tariff might rise, meaning no change from PLN 500/MWh.

The government laid out in mid-September its priorities for the next two years until the general election set for autumn 2027 [story here] and said that the power price would not rise above PLN 500/MWh. It did not explain this further, but this does suggest that if there were any negative surprises in terms of electricity prices, it could impose some sort of cap again. But my expectation for now is that there will be no cap in 2026, though that is not set in stone and if the tariff is lining up to be above PLN 500/MWh, one can definitely not rule out the maintenance of the PLN 500/MWh frozen price.

• Domanski says assumptions in debt strategy are based on no-policy change path

Finance Minister Andrzej Domanski said that fiscal policy was being conducted so that any crossing of the 55% of GDP level proscribed by public-finance legislation was done as late as possible, according to comments made in a late afternoon interview with broadcaster TOK FM. The latest public debt management strategy showed that the key measure for public debt would cross 55% of GDP in 2028, and that would trigger a mandatory austerity program in 2030. When it was noted that the previous government had simply removed the former lower safety threshold of 50% of GDP, Domanski said he would not do so and would abide by the current legislation, though added President Karol Nawrocki would be unlikely to sign anything on this into law anyway. As noted in comments cited being made Tues., Domanski likewise noted the public debt forecasts in the strategy assumed no policy change whereas the ministry was trying to improve the situation of public finances.

Domanski said the FinMin was trying to improve public finances step by step. It had repaid some PLN 35bn of the debt owed by the state bank BGK and the Polish Development Fund (PFR) even though it had also boosted defense spending. He said he would personally like to repay the debts incurred by the previous government more quickly, but due to this threshold, the repayment rate is slower than he would like. He also voiced support to consolidate the various funds managed by BGK since some were run inefficiently.

Domanski and the FinMin has proposed to hike the CIT rate on banks and to up the excise tax on alcohol and the levy on sugary products, though President Karol Nawrocki has said he opposes any tax increases. On the sense of including those moves in the 2026 state budget, Domanski said one could not include or exclude a potential item just because the president's aides said one thing or another. "We include in the budget the revenues that result from bills included in the government's legislative agenda," he said. "I will be very surprised if the president vetoes the corporate income tax increase for the banking sector." Domanski added that one of the reasons for the recent rating outlook revisions to negative was the fight between the government and the president, noting that if the president vetoed all of the government's proposals, rating agencies would react.

Overall, Domanski is trying to reassure the market that the public debt strategy's forecasts are a no-policy change path that won't come true. The first thing to say is that he and PM Donald Tusk do seem to realize that they can't add more spending or tax cuts, and so the promise to double the standard tax deduction has rightly been put off until public finance are in better shape. The second thing is that it is unclear whether the FinMin believes the CIT hike on banks or other tax hikes are enough or whether more measures will be announced. Considering the shaky ruling coalition and its general low popularity, it is hard to believe any major tax increases will be planned, but it is hard to believe for the same reasons that there will be any cut to social spending. Domanski's job is likely to ensure things don't get worse than expected and the 55% of GDP level is crossed early, and then fixing public finances will be left up to the next government.

• Party founder Holownia said to be trying to leave Polish politics to go to UN

Polska 2050 leader Szymon Holownia has said he planning to leave Polish politics and wants to join the UN as a high commissioner, leaving the junior ruling party in shock, according to a report from Onet.pl. Holownia founded Polska 2050 as a new third-way movement after his surprisingly strong showing with 13.9% in the first round of the 2020 presidential elections. Polska 2050 managed to carve out a strong position on the political scene and, in coalition with the Polish Peasants' Party (PSL) as the Third Way (TD), received 14.4% in the October 2023 general election. That led to Holownia becoming Sejm speaker, though he will leave that position in November as part of the ruling coalition deal that will see Left co-leader Wlodzimierz Czarzasty take over. Holownia ran for president again in May, but did much worse, getting 5.0%, and he has seen his star fall further since.

If it is confirmed that Holownia will leave Polska 2050, then that puts the rest of the party in a tough spot since there are no more major names. Many of the members also left the senior ruling Civic Coalition (KO) and so won't necessarily have a spot there. One Polska 2050 official told Onet that the process of "the disintegration of Polska 2050" has begun. "The only thing keeping us alive is our presence in government and profiting from being in power," it was added. Polska 2050, which broke off its coalition with the PSL, has been polling as low as 1.0%, which is well below the 5% threshold for parliamentary representation and is even below the 3% needed to receive state funding.

With Holownia to cease being party leader this December, there is the question of who will take over. Polska 2050 just on Tues. chose Fund and Regional Policy Minister Katarzyna Pelczynska-Nalecz as their candidate to be deputy PM [which is in replacement for losing the speaker's chair], but it remains to be seen if PM Donald Tusk will agree since there is no love lost between the sides. Still, the choice of the fund minister was seen as potentially strengthening her hand in taking over the party, though her profile is low. An ex-bank chief economist Ryszard Petru, who did lead the former third-way party Nowoczesna, has said he would like to take over Polska 2050 as well, though his chances are apparently low.

Overall, Polska 2050 still has 30 MPs, which is key in the ruling coalition mustering a majority and so its ultimate fate is important. The party's position doesn't look strong and it looks unlikely to make the next parliament, whether led by Pelczynska-Nalecz or anyone else. But there will be a question of how the post-Holownia party views its role in the coalition. It is simply hard to believe it will do nothing and sit quietly, and so there is a likelihood that it will have to do something shocking to win attention and potentially votes and so this will likely hurt coalition stability. On the other hand, a rump party with MPs that are bound to lose their privileges in the next election also means there will be an incentive to have the coalition survive. Where Polska 2050 falls on the scale of seeking a demonstrative way to win back support to sitting meekly to enjoy what it has won will be crucial into how it will impact coalition stability with about two years to go before the next scheduled general election.

• Next MPC meeting: Oct 7-8, 2025
• Current policy rate: 4.75%
• EmergingMarketWatch forecast: 4.75%

Rationale: Monetary Policy Council members have not sounded like they are ready to cut rates again at the next policy sitting on Oct 7-8, having just cut by 25bps at the Sep 2-3 meeting, but one can't rule out a cut as the threat of a big power price rise in Q4 has been avoided. Despite the fact President Karol Nawrocki has signed into law government legislation holding the power price cap for Q4 and the fact CPI inflation was slightly below expected in September at 2.9% y/y, we think the MPC will be cautious. The MPC has gone out of its way to state it is not in an "easing cycle" and is only "adjusting" rates to the current reality. Leaving aside the academic differences here, the MPC clearly does not want the market to expect cuts too much. If it were to cut again, then that would open the door to the expectation of further cuts this year whereas all MPC members have tended to stress there is only 25bps less.

The MPC's caution has seen them cutting every second month, cutting in May, holding in June, cutting in July, holding in August [though there wasn't a meeting], and cutting in September. This cadence would suggest a hold in October followed by a cut at the following sitting on Nov 7-8, which could be timed to the updated Inflation Report and would mean the council could rest easy having delivered 125bps of cuts in 2025.

The MPC is likely to stress the fiscal policy risk to inflation at its October sitting, and that will give it a convenient excuse not to cut. Fitch and Moody's have both now cut the outlook on their ratings to negative, and it can only be a matter of time until S&P does the same in early November. The outlook for public finances is indeed poor and it is hard to believe there will be any real consolidation until after the next general election. Though it is unclear if the current ruling coalition will survive until the scheduled end of the term in autumn 2027, it doesn't seem likely there will be major fiscal consolidation until 2028, and that could be a year a key debt threshold is crossed. This leaves aside the idea that the government to win in 2027, or whenever the next election occurs, will likely be promising to spend more or not to raise taxes, and so it is unclear if there will be the political will to consolidate public finances unless pressed.

Overall, we still expect a 25-bp cut at the November sitting, though one can't rule out that the MPC will cut in October to time the move with the power price decision and then signal the taking of a longer wait-and-see stance. MPC members are cautious about repricing in 2026, the fiscal threat, and the longer-term threat of the EU's ETS2 rules being extended in a development NBP head Adam Glapinski has said could up CPI inflation by 2pps in 2027. All of these risks are likely to constrain the MPC's hand in 2026, though one should expect at least 50bps more in easing and slightly more if the outlook improves.

Archived video of all MPC press conferences

MPC's post-sitting statements

Latest council minutes

Latest NBP inflation report (July 2025)

Most recent MPC voting results

• PMI rises for 3rd straight month, begins approaching 50 no-change mark

Poland's manufacturing PMI jumped 1.4pts m/m to 48.0 in September from 46.6 in August, rising for the third straight month to the highest since April, but still signaling an overall deterioration in operating conditions, according to a statement [link to actual report] published Wed. by S&P Global. The reading for September came in well above the 47.0-pt consensus. S&P noted that the rise was reflected in four of the five components, although all except suppliers' delivery times still had negative overall contributions.

Data Download

New orders fell for the sixth month running in September, but the rate of contraction slowed for the third month in a row. New export orders fell for the sixth month running as well, but at the slowest rate in four months and some firms noted recovering demand from European markets.

Production fell as a result, falling for the fifth month running, with the rate of contraction the softest over this sequence and only modest. With lower orders and output, employment was cut for the seventh time in 2025, though the rate was marginal.

Backlogs of work increased for only the second time in over three years, goods producers reduced their input buying for the fifth month running in September, and stocks of purchases were cut for the sixth successive month. Suppliers' delivery times lengthened fractionally in September.

The 12-month outlook for production stayed positive in September. Companies linked growth forecasts to economic recovery, new markets, RRF funds, and new products.

Average input prices declined for the third time in the past four months and at the fastest rate since January. Output prices fell for the third time in the last five months, albeit only fractionally.

Overall, the PMI reading continues a slow improvement after crashing to 44.8 in June, and it appears foreign and domestic demand conditions are improving. In broad terms, economic growth is likely running at a decent 3%, wage growth remains in the 7-9% area, the unemployment rate is near a record low, inflation has fallen below 3%, and interest rates have been cut by 100bps. The question perhaps is why consumers and manufacturers are so glum rather than still pessimistic, with the domestic, regional, and global political backdrops likely to blame plus questions over affordability. At any rate, if the broad macro backdrop continues, there should be a continued improvement in sentiment writ large.

• Raw material imports rise by 11% y/y while consumption goods grow by 8% y/y
• Gold purchases alone inject USD 2.3bn into widening deficit
• Export revenues register modest 3.0% y/y increase

The external trade deficit experienced a significant 33.4% y/y expansion during September, reaching USD 6.9bn, trade ministry's preliminary statistics showed. This expansion was driven by import expenditures that exhibited 8.8% y/y rise, totalling USD 29.5bn in September. The most notable rise was observed in raw materials, which increased by 11% y/y, followed by consumption goods with 8.0% y/y increase and capital goods increased by 0.4% y/y. China stood as the top import market with 14.5% share, followed by Russia and Germany. According to trade minister Omer Bolat, fluctuations in gold imports added USD 2.3bn to the trade deficit.

Export revenues registered a 3.0% y/y increase to USD 22.6bn in September. The expansion was mainly on the back of raw material categories and consumption goods, which recorded respective increases of 6.5% y/y and 1.8% y/y. Capital goods exports, however, declined by 1.9% y/y. The EU sustained its commanding 44.5% market share as Turkey's predominant export recipient, with Near and Middle Eastern regions plus supplementary European markets maintaining sequential prominence. Germany preserved its leadership position among individual destination countries with 8.4% share, followed by the UK and the US.

Cumulatively, the Jan-Sep period witnessed 11.8% y/y trade deficit expansion to USD 67.0bn, primarily driven by 5.9% y/y import growth outpacing corresponding 4.1% y/y export advancement. Annualised calculations revealed the trade deficit achieving 13.5% y/y escalation, culminating at USD 89.3bn.

• Washington bureau chief Gunay's leaked footage declares Turkey gains nothing from Trump-Erdogan meeting
• Gunay exposes rivalries between Bilal Erdogan, Fidan, and Bayraktar
• NTV dismisses Washington bureau chief after leaked White House garden conversation
• Erdogan avoids questions, and may weigh cabinet reshuffle to control party dynamics and messaging

Turkish broadcaster NTV proceeded with the dismissal of its Washington bureau chief Huseyin Gunay following a controversial incident during President Erdogan's recent visit to the White House for discussions with President Trump, the local media reported. The footage revealed Gunay engaged in conversation with a state-run Anadolu Agency cameraman in the White House garden. Throughout the captured video, Turkey literally obtained no gains from the diplomatic engagement, Gunay said, and further characterised the meeting results as unfavourable for Turkish interests. According to Gunay's claims, Trump asked Erdogan to accommodate potential Palestinian refugees, cease natural gas purchases from Russia, curtail commercial relations with China, and restrict financial transfers to Palestinian territories. Gunay additionally referenced perceived conflicts among senior governmental figures, specifically mentioning tensions involving Bilal Erdogan, foreign minister Hakan Fidan, and President Erdogan's son-in-law Selcuk Bayraktar. The dismissed correspondent's statements regarding internal governmental rivalries exposed, in our view, some deeper questions surrounding Turkey's political trajectory beyond Erdoğan's leadership tenure. The leaked remarks suggested ongoing competition among influential circles concerning the nation's future governance structure, we note.

Foreign minister Fidan emerged as a particularly significant figure in these reported internal deliberations. His background as longtime director of Turkey's National Intelligence Organization (MIT) positioned him as a prominent figure within government hierarchies, we assess. His recent comments on Turkey's fifth-generation KAAN fighter programme, specifically that engine licensing awaited US congressional clearance, continued to stir debate at home, we assess. It also raised additional questions suggesting, in our view, possible strategic positioning within internal political competition when viewed through the lens of MHP leader Devlet Bahceli's recent remarks on a Turkey-Russia-China (TRC) alignment, namely that Fidan may have calibrated his messaging to signal policy optionality to nationalist constituencies.

President Erdogan declined to address the matter during the Grand National Assembly's opening, we note. Given Fidan's long service as MIT chief and his embedded networks across the security and diplomatic apparatus, the controversy carried institutional significance rather than routine political noise, in our assessment. Erdogan, a highly tactical operator, may have been waiting for the optimal moment to remove Fidan, we assess. In that light, he could bring forward the long-discussed cabinet reshuffle and dismiss Fidan to reassert command over party dynamics and restore message discipline. The timing would aim to maximise control benefits while minimising policy disruption and external blowback, we judge. If he refrains, he risks projecting a loss of internal control to both the party base and the state bureaucracy, potentially emboldening rival alignments and narrowing room for manoeuvre on security and foreign-policy files, in our view.

• Volumes beat decade average by 66.5%, signalling broad market strength
• Campaigns, gold-fuelled wealth effects, FX fears pull demand forward

New-vehicle sales rose by 25.7% y/y to 110,312 units in September, the Automotive Distributors and Mobility Association (ODMD) data revealed. Passenger car sales increased by 26.8% y/y to 88,274 units, while LCV sales advanced by 21.7% y/y during the month. We ascribe the upswing to mid-year campaigns that pulled demand forward. Another contributor may be high gold prices, which amplified the wealth effect and supported purchases, we think. In this regard, we note a recent study by QNB estimated that USD 363bn of Turkey's gold stock is held under the mattress. On the other hand, given the market's import reliance, any FX-depreciation expectations might have brought purchases forward as households sought to pre-empt possible price resets. Crucially, what we know is that the gain was not a mere statistical artefact. September volumes exceed the 10-year monthly average by 66.5%, indicating broad-based strength beyond base effects, we assess.

Cumulatively, total sales reached 927,647 units, up by 9.2% y/y in Jan-Sep. Passenger cars rose by 10.0% y/y to 742,687 units, representing 80.0% of the period total. Powertrain shares over the period were led by gasoline - 46.6%, hybrids - 26.7%, EVs - 18.0%, and diesel+LPG - 7.9%. LCV sales increased by 5.9% y/y to 184,960 units in the same period.

Foreign minister Hakan Fidan discusses ceasefire plan in Gaza with his Italian counterpart Tajani (Hurriyet)

President Erdogan: We can solve every problem and spoil every game (Hurriyet)

Justice minister Yilmaz Tunc's reaction to CHP not attending opening of Parliament: It is disrespectful to legislature and nation (Hurriyet)

Crude steel production increases by 7.9% y/y in August (Sozcu)

Manufacturing contraction accelerates in September (Sozcu)

Foreign trade is strengthening in Central Black Sea region (Sabah)

Agriculture ministry signs for TRY 2.5bn irrigation renovation project in Kahramanmaras (Sabah)

Rate of startups using artificial intelligence increases to 7.5% (Sabah)

Natural gas imports increase by 8.5% y/y in July (Sabah)

Sixth wave in bribery operation in Antalya metropolitan municipality (Sabah)

President Erdogan meets MHP leader Devlet Bahceli and DEM party co-chairs (Sabah)

Javier Milei compared Scott Bessent to Messi and spoke about rebuilding ties with the dialogue-seeking opposition (Infobae)

The Treasury sold USD 500mn to contain the dollar and was almost the only seller in the market (Infobae)

Due to the temporary cut in export taxes, tax revenue fell 10% in September (Infobae)

[LLA top Buenos Aires candidate for the midterms] Espert refused to answer whether Fred Machado transferred USD 200,000 to him during the 2019 campaign (La Nación)

Fred Machado, the businessman investigated for drug trafficking who became a shadow over Espert's campaign (La Nación)

Pointing at Kirchnerism, Milei confirmed Espert as candidate: "It's clear this is a cheap operation." (La Nación)

Democrat lawmakers ask Trump to "immediately halt" the financial aid plan to Argentina (Clarin)

The Senate meets this Thursday and the opposition has the votes to overturn Milei's vetoes on the Garrahan and university laws (Clarin)

• Treasury paid a big fiscal cost to buy USD 2.2bn from grain exporters, sells a fifth on a single day to defend a strong exchange rate
• Interventions still arrive with exchange rate not hitting the ceiling of the currency band
• Interventions raise the cost of course-correction, market seems in agreement govt is making a mistake

The BCRA is estimated to have sold nearly USD 500mn on the spot FX market on behalf of the Treasury on Wed., with the goal of containing depreciation even though the exchange rate still hovered within the currency band that is supposed to be a free-floating zone. The Treasury purchased USD 2.2bn in the spot market between Sep 25-30 after offering grain exporters a special window to sell USD 7.0bn worth of product at 0% export tax, a fiscally costly initiative, and it has already sold at least a fifth of those purchases to defend a strong exchange rate for a single day. We said in our last article that seeing the Treasury sell USD in the spot market on Wed. would be a negative sign [link]. Not only did it sell, but it did so in a way that suggests it will either keep burning through USD aggressively or move to significantly tighten FX controls in the coming days (perhaps both).

For a brief explainer of the situation:

The risk evaluation of the Argentina story changed significantly for the worse over the last three months. The market sees a much higher chance that the populist Peronists could return to power in 2027, and this forces a significant change to the economic policy program that the government has been resisting. The government's program was banking on portfolio inflows sustaining a strong exchange rate and the sovereign returning to markets to refinance its debts starting in January 2026. The situation changed. Under the currently available information, the market judges that the government will not be able to return to markets any time soon, so the economy needs a significantly weaker exchange rate and for the government to start buying USD in large sums.

Not only is the government refusing to comply with what the market wants it to do, which is to float the exchange rate and buy reserves, it is betting all in on its prior approach under the belief that two catalysts will turn the story back around over the next month. Not only is Economy Minister Luis Caputo refusing to build up reserves, he seems willing to burn through the few borrowed USD the government has to defend an exchange rate that is not close to what would be a market equilibrium (under the current risk assessment for the economy).

Caputo's all-in bet is that exchange rate stability is absolutely necessary for the ruling Freedom Advances (LLA) to have a strong midterm election on Oct 26, and that LLA can win that election convincingly. A convincing LLA win would go a long way toward dispelling fears that the Peronists will return to power in 2027, and that would be a huge positive force leading to significant gains across asset classes, including sovereign bonds. That gain in confidence alone would be nearly enough bring the economic program back on track and allow the sovereign to potentially complete its return to sovereign debt markets in 2026. The other potential catalyst for a turnaround would be direct and strong involvement from the US Treasury, either through massive secondary market purchases of Argentina bonds or a direct loan.

The risks with Caputo's bet are obvious. If the election turns out even or LLA losses, and the US's monetary involvement isn't massive, the size of the exchange rate depreciation that will be necessary to balance Argentina's external accounts and make them consistent with external debt repayment becomes bigger the more Caputo burns through USD today.

Perhaps our biggest issue with Caputo's strategy is that we feel this is a problem that shouldn't exist. Looking back, it seems obvious that his insistence with a strong exchange rate was a mistake, and we said so repeatedly at the time. But even looking at the issue from today, we don't see the reason to be mortally afraid of depreciation. The REER today is a lot more reasonable than the REER Argentina had 4-5 months ago, but it remains strong. That depreciation over the last 4-5 months had a negligible impact on inflation, and if it was a cause of concern on markets and the press, it was because of the way the Treasury acted during it. We can't help but think that moving to a floating exchange rate regime in which the Treasury also buys USD to rebuild FX reserves would not be traumatic as Caputo seems to think. To the contrary, there would be a consensus that such as scheme would leave Argentina in prime position for strong growth over the next two years, assuming LLA doesn't get crushed in the midterm elections.

Lula and Trump: [ForeignMin] Vieira talks about avoiding confrontation and provocation and separating trade from politics (Estadão)

Senate approves [second draft of] tax reform regulation [on consumption]; text returns to lower house (Terra)

Income tax exemption is not a favor from the state, it is a right, says [Speaker] Motta (Poder360)

Lula says he is convinced that the lower house and Senate will approve the expansion of the income tax exemption (G1)

[Rapporteur] Lira accepts only three of 99 amendments and maintains the core of the income tax reform (O Globo)

Commission approves BRL 4.9bn electoral fund [from previous BRL 1.0bn] with support from Lula's base (Gazeta do Povo)

Government publishes rules to prevent Bolsa Família and BPC [welfare program] beneficiaries from placing online bets (Carta Capital)

São Paulo confirms 22 cases and closure of bars due to methanol poisoning (UOL)

• Lower domestic demand reduces new orders at fastest pace in almost two and a half years, S&P says
• Order cancellations caused by additional US tariffs are partially offset by higher demand from other countries such as Mexico and Italy
• Input and final goods' prices fall due to dollar depreciation and increased input supply

The S&P Global Brazil PMI fell 1.2pts m/m to 46.5pts in September from 47.7pts in August, marking the seventh consecutive decline, according to data released Wed. by S&P Global. The indicator has remained below the 50-pt neutral mark for six consecutive months. Lower domestic demand reduced new orders at their fastest pace in almost two years while external demand declined more moderately. Companies noted that orders were canceled due to US tariffs, but this was partially offset by higher demand from Italy, Argentina, Mexico, Uruguay, and the UK. Despite the contraction, companies remain optimistic about the future, hoping demand will pick up and anticipating a potential tariff agreement with the US. This optimism allowed employment to increase marginally in September, following a moderate decline the month before.

Data Download

Input prices fell for the first time since late 2023 due to USD devaluation and increased input supply, allowing final prices to decline for the first time since October 2023. Lower overall company expenditures also contributed to the decline in final prices.

Overall, the PMI has remained below the neutral mark for six months, signallng the impact of the BCB's monetary tightening on industry. The BCB forecasts industrial output to rise 1.0% in 2025, down from the previous 1.9% growth expected, according to the September Monetary Policy Report. The bank also indicated that US tariffs are hurting the sector, although the government's expectation that the impact would be limited appears accurate, as other markets are serving as alternatives. While the effects of monetary tightening continue to deepen on other sectors, the BCB is likely to hold the Selic at the current 15.00% level at least until year-end, in our view.

Mexico imposes a compensatory quota on Chinese Steel (La Jornada)

Treasury says growth has been positive and sustained, despite trade pressures (La Jornada)

Edgar Amador says supporting PEMEX rose the fiscal deficit (El Financiero)

Treasury defends rigorous fiscal discipline in the first year of the Sheinbaum administration (El Sol de México)

Edgar Amador Zamora says the fight on corruption and tax evasion have yielded fruit (El Economista)

Economy Ministry consults business leaders as the USMCA revision approaches (Reforma)

Sheinbaum strengthens her political power in her first year in office; MORENA shows scandals, nepotism and luxuries (Animal Político)

Claudia Sheinbaum surpasses López Obrador's popularity in her first year in office (El País)

Sheinbaum seeks to strip future legislators of their immunity (Milenio)

Fuel sales have their worst fall in two years (El Financiero)

• Down 3.1pts y/y, INEGI's PMI holds below benchmark
• S&P's PMI falls 0.6pts m/m, warns weakness persists as output and employment fall

INEGI's Manufacturing Orders Index (PMI) fell by 1.16% m/m in September, per seasonally adjusted data published by the stats office INEGI on Wednesday. The contraction came with mixed performance of the index's components, with the sharpest contraction in the expected supply delivery component, down 5.37% m/m sa.

Data Download

INEGI's PMI fell by 3.1pts y/y in September, in the second decline in a row. With this, the index remained below the 50.0pts benchmark for the third time in a row, at 47.9pts. This is consistent with S&P's PMI, which fell below the benchmark in September, down by 0.6pts m/m. This shows the positive deviation from the benchmark seen in August look like a fluke, in our view. Indeed, S&P warned the manufacturing industry remains fragile, with weakening employment and output.

Data Download

Overall, the manufacturing industry continues to show weakness amid lingering adversity. US protectionism and reigning uncertainty hinder any strong rebound, in our view. However, PMI data, along with other indicators, show resilience in many industries, suggesting a more significant rebound can come once this uncertainty begins to fade.

• Inflow remains strong, at USD 5.6bn in August
• But negative trend is clear, inflow falls 5.9% y/y in Jan-Aug

The remittance inflow fell by 8.3% y/y in August, the CB said on Wednesday. This is the fifth contraction in a row, accelerating from a 4.7% y/y fall posted in July.

Data Download

The inflow remains relatively robust, at USD 5.8bn in August, holding above 5.0bn over the last four months. However, a base effect is to blame for the y/y contraction, after the inflow jumped by 9.2% in August of last year. Indeed, a statistical effect should ease the contraction in the coming months. However, this will only moderate the contraction scored in 2025, considering the inflow fell by 5.9% y/y in Jan-Aug.

Overall, remittances have suffered through 2025 (and since late 2024), coming from a high comparison base. It's not clear to us what is pushing down the inflow. We've speculated the decline might be due to slowing economic growth in the US and the anti-immigration policy imposed by the Donald Trump administration, hindering work and transfers by those illegally in the US. However, this does not accommodate with remittance data from other countries in LatAm. Thus, it's unclear to us if the deceleration might be in part transitory.

• But raise their year-end core inflation projection for 2025
• Increase their core and general inflation forecasts for 2026
• Analysts continue to revise up their 2025 GDP growth forecast, trim their 2026 forecast

Analysts cut their 2025-end CPI inflation forecast from 3.97% a month ago to 3.85% in the poll published by Banxico on Wednesday. This adds to a revision down of 0.19pps over the last two months, in a welcomed development. However, analysts raised their year-end core CPI inflation forecast to 4.18%, adding to an upward correction of 0.42pps since Q1-end. This anticipates the experts predict weaker inflationary pressure from non-core inflation, which is volatile, might surprise, and is not linked to the economic cycle or the CB's monetary policy and, thus, should not drive the CB's actions, in our view.

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Analysts lifted their 2026-end general inflation and core inflation forecasts. With this, analysts now see inflation closing 2026 at 3.80%, off from the CB's expectation that inflation will converge with its 3.00% punctual target by Q3 2026. This continues to show the poor credibility of the CB's forecast.

Analysts lifted their 2025 GDP growth forecast, to 0.50%, up by 0.30pps in Q3. This positive revision is consistent with better-than-expected performance in H1, fading uncertainty and a resilient private market. Still, projections remain weak, with analysts projecting growth at 1.35% next year, trimming their projection after a positive revision a month ago.

90% of analysts expect monetary easing in Q4. This surprises us, considering the CB is very likely to cut twice its policy rate, in our view, bringing the policy rate down to 7.00% by year-end.

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• Next MPC meeting: November 6
• Current policy rate: 7.50%
• EmergingMarketWatch forecast: 25bps cut

After the CB cut its Monetary Policy Rate (MPR) by 25bps to 7.50% last week, as the market fully expected, CB Governor Victoria Rodríguez took it to the press to insist on a dovish discourse, insisting there are further conditions for monetary easing ahead. As in the past, she minimized inflationary pressures, saying there's been significant disinflation from 2024, something that is certainly true but is mostly contained in non-core inflation, which does not follow the economic cycle or the CB's monetary policy and should be secondary to the CB's actions, in our view. On core inflation, the governor seemed to celebrate it's stabilized; however, it's worrying to see the CB's board being content with where it's stabilized considering core inflation adds four months above 4.00%, with lingering upward pressure from many of its components.

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Indeed, we believe Governor Rodríguez is not alone in this dovish discourse. Deputy Governor Omar Mejía continues to disregard inflationary pressures and insists weak growth expectations justify further monetary easing. Indeed, this was one of the arguments presented by the governor in her interview. However, we note the market, including the CB, has recently raised its growth expectations for both 2025 and 2026, with the CB insisting CPI inflation will converge to its 3.00% punctual target by Q3 2026 nevertheless.

With this, we fully expect both Governor Rodríguez and Deputy Governor Mejía to favor further monetary easing during the rest of the year and, probably, in early 2026. We are confident they'll remain in the majority during the rest of the year, joined by Deputy Governor José Gabriel Cuadra and, most likely, Deputy Governor Galia Borja. Both might be willing to look at the Federal Reserve's current easing as another argument to continue the easing cycle in the next two sittings and (perhaps) beyond. Indeed, Governor Rodríguez said this was another factor to justify further monetary easing ahead.

It'll be interesting to read whether Borja or Cuadra moved away a bit from the dovish rhetoric in the latest sitting; thus, we believe their position will be most relevant in the sitting's minute, to be published on October 9. However, we have been surprised by Cuadra's dovish discourse and expect him to remain on the side of further easing in the next few months. We believe Borja might abandon the dovish side of the board down the road, given she's voicing concerns on the pace of core inflation; however, there is no certainty she'll move to a more neutral tone anytime soon.

Consensus polls are now showing the market expects the MPR will close the year at 7.00%, in a swift correction, considering consensus polls showed the market expected no easing in November and December. The revision seems linked to recent monetary easing by the Federal Reserve.

We expect to read a lot about the Fed in the sitting's minute. However, we believe it will be interesting to see how many board members show concern about the pace of core inflation or the fact mid-term general inflation expectations are only loosely anchored. We expect the discussion of budget-linked inflationary pressures to be limited in the September sitting, with the board probably waiting for its approval. Still, the board should ponder the inflationary impact of the budget, in our view, given it will certainly pressure CPI inflation up in 2026 by imposing tariffs on some Asian imports and by raising taxes on sugary drinks, video games and tobacco.

Overall, we are confident the CB will cut its policy rate by 25bps in November, bringing down the policy rate to 7.25%. We expect the CB will vote for another 25bps cut in December and see the chances of further easing in Q1 above 50%. However, early 2026 easing is less clear, in our view, depending on the Federal Reserve's actions and the dovishness of the kingmakers in the CB's board. Indeed, early 2026 monetary policy should depend on inflation data and mid-term expectations, but it might not, given the dovish stubbornness of the bulk of the board. Thus, we see the MPR falling to 7.00% by year-end, anticipating further easing in early 2026, with the policy rate falling to 6.75 or 6.50% by Q1-end.

• Deterioration slows in September, with relevant m/m rebound
• Commerce net sales plunged in July and August, rebounded 1.7% y/y in September

Manufacturing output expectations plummeted in Q3, per data published by the stats office INEGI on Tuesday. The September contraction, of 6.8% y/y, shows quite an improvement vs the 19.9% y/y plunge scored in August. This was obtained thanks to a solid m/m rebound of the indicator, suggesting the quarter collapse might not carry on with all its strength into Q4.

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The aggregate trend indicator for the manufacturing industry declined m/m, despite better output hopes. Moreover, the indicator continued to fall y/y, pressured down nearly across the board.

The aggregate trend indicator in commerce fell y/y too, but only by 0.5% y/y, showing a relative improvement vs the 14.0% y/y plunge posted in August. This rebound is consistent with better net sales expectations, up 1.7% y/y in September, after posting two two-digit contractions in July and August.

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Business expectations in the non-financial services sector showed weakness too, with the aggregate trend indicator down by 3.9pts m/m. In turn, the construction industry posted mixed results, with the expectation of works as a principal contractor jumping by 31.6% y/y, ending a five-month negative trend with strength. This was not due to a base effect, with the index jumping to 57.0pts in September, the best result since March and second best in more than ten years.

Overall, business expectations for the manufacturing industry weakened severely in most of Q3, rebounding relevantly to close the quarter. It will be interesting to see how these expectations perform in Q4. In any case, it's curious to see a lag in these expectations vs the imposition of tariffs from the US, recalling most uncertainty seemed contained in Q2, when the US threatened with broad tariffs, which ended up contained to a few industries, in what seems like a privileged position held by Mexico vis a vis other key US trading partners.