Forint in shambles: 400 HUF/EUR may be on the cards

Despite a promising performance in the first half of the fiscal year, the forint fell steeply over the summer. Could the end of this year bring a 400 HUF/EUR exchange rate?

Forint coaster: rolling downhill?

The forint was the fourth worst performing currency globally in the third fiscal quarter of 2023, Portfolio reports. After a temporary 2.5% strengthening against the euro in the first half of the year, the Hungarian currency has weakened by 4.4% in the past three months, underperforming both globally and regionally. Besides domestic policy, the strengthening dollar is also to blame: the forint fell by 7.7% against the greenback in Q3, outperforming only the Argentinian and Chilean pesos and the Russian ruble.

Aggravating factors

The following six key factors well explain the sudden depreciation of the Hungary currency. What makes matters worse, they will likely continue to wreak havoc.

• The reduction of interest rates by the Central Bank of Hungary from an outstandingly high 18% to 13%, with further projected cuts in the future
• Persistently sky-high inflation rates due to the already 700 billion HUF (EUR 1,800,356,600) overstretch of the 2023 budget.
• Market fluctuations and negative investor sentiments as a result of possible austerity measures
• The underperformance of the Hungarian economy, with the ongoing recession only expected to improve in Q4. Even with a positive fourth quarter, the previously planned 1.5% growth in GDP in 2023 seems unattainable at present
• EU cohesion and recovery funds are likely to remain frozen without any agreement between the Hungarian government and the European Commission on issues of corruption and the rule of law
• The steady strengthening of the dollar against the euro.

Gloomy outlook

Due to a strong Q1 and Q2 performance, year-long statistics show that overall the Hungarian currency is still up by 1.3%. However, the last three months of the fiscal year could see a return of the 400 HUF/EUR nightmare, Portfolio warns. Firstly, a sustained strengthening of the dollar against the euro will take a toll on the forint. Secondly, late October might bring further reduction of interest rates inflicted by the Central Bank as inflation dwindles. The end of the year will also likely necessitate answers on the volatility of the national budget and the fate of stuck EU funds.

A significant increase in the deficit target of the budget, as well as an ongoing standstill in negotiations with the European Commission, would send a negative message to markets, shaking the fragile sense of security of the Hungarian economy at its core. Cooperation with the European Commission and gradual and moderate adjustments to the budget, Portfolio concludes, would be crucial to dispel market concerns about the economy in order to remain near the 390 HUF/EUR exchange rate for the remainder of 2023.

Author: Dóra Busi