Gergely Szakacs and Krisztina Than

BUDAPEST, (Reuters) – Hungary’s blue-chip stock market slumped Thursday. Oil and gas groups MOL and OTP suffered losses following Budapest’s announcement that it will impose windfall tax on bank and company profits to fill a budget deficit.

Investors were rattled by Prime Minister Viktor Orban’s Wednesday announcement that his government would “oblige banks and insurers, large retailers chains, the energy sector and trading firms to pay large parts of their extra profits into state funds.” This was a stark contrast to the similar taxes Orban used after fixing the budget in 2010, when he became president.

Analysts said that some of the previous special temporary taxes remain in force and are reducing profits from a broad range of industries, thereby increasing instability for investors.

Orban should control the growing deficit in his budget and avoid a slowdown of the economy. Meanwhile, inflation will accelerate to two-digits in the coming months.

At 1230 GMT, his government will announce the details. Before the announcement, banks and affected companies declined to comment. The central bank declined to comment.

Peter Szijjarto, Foreign Minister of Hungary said that the temporary sectoral tax windfalls did not impact manufacturing firms. He also stated Thursday that Hungary offered “the best investment climate in Europe”.

MOL shares dropped close to 9% while OTP was down 4.2%. This trims earlier losses even more sharply. Magyar Telekom stocks fell almost 6% as of 0950 GMT.

Orban stated that the new windfall tax would apply in 2022 or 2023. His earlier special taxes, such as a bank transaction tax, have been a permanent part of Hungary’s tax system and the banks have passed these costs on to clients.

New taxes will increase revenues to the budget which is in deficit following Orban’s spending spree pre-election and cap on energy bills, which saw him win a stunning victory.

Investors are also at risk from these signs.

These steps are not a positive message for investor confidence. As an investor, you need to look at what sector is going to outperform. And you can’t find one because the government will take the profits from a sector that does well,” stated Bence Jozsa of Equilor, an analyst.

Stocks are falling because of this.

Marton Nagy, Orban’s minister for economic growth and development, told parliament last week that the government wants to increase domestic ownership in key strategic areas. Businessmen who are close to the government own large swathes of media and bank sectors, as well as energy companies, over the last decade.

Nagy mentioned the need for “domestic ownership to become dominant” in areas such as food retail, insurance, and telecoms. These sectors will be directly affected by new taxes that could reduce profit margins.