Hungarian economy has good prospects, forint exchange rate may stabilise

The Hungarian economy will stagnate this year. The yearly inflation will be around 17.7 percent, Fitch Ratings’ new analysis said. However, they calculate a EUR 10 billion allowance opened by Brussels. Moreover, the Hungarian National Bank may decrease the base interest rate to 5-6 percent by the end of 2023. That may result in the free fall of the forint since the exchange rate is only protected by the very high base interest rate. Of course, if the EU funds opened for Hungary, that would mean a completely new situation.

Hungarian investment grade is like Kazakhstan’s, the Philippines’, Italy’s

According to novekedes.hu, Fitch expects an average of 3 percent economic growth in Hungary for the coming years. Meanwhile, they affirmed Hungary’s investment grade ‘BBB’ sovereign rating with a negative outlook on Friday’s scheduled review. BBB means that Hungary is in the same category as Bulgaria, Italy, Cyprus, Kazakhstan, the Philippines, and Indonesia.

“Hungary’s ratings are supported by strong structural indicators relative to ‘BBB’ peers, a record of economic growth fuelled by investments and solid net FDI inflows,” they said. The Hungarian investment grade has been with a negative outlook since January. Meanwhile, the company raised the Hungarian state debt rating from BBB minus to BBB four years ago.

The analysis highlighted that the shrinking energy import costs did good, but they emphasised the country’s dependence on Russian energy. The explanation for the negative outlook was the risks to the Hungarian political leadership’s credibility.

EU money will start to flow into Hungary

Fitch wrote that inflation is the highest in the EU in Hungary, and price caps did not help. They expect an agreement between Budapest and Brussels concerning the EU funds. Still, there is a great amount of uncertainty about the disbursements of the allocations. They expect Hungary will get EUR 10 billion from the 2021-2027 budget.

The company wrote that the inflation would be 17.7 percent this year. In 2024, it will decrease to 5 percent. Meanwhile, in 2025, it will be around 3.1 percent. The Hungarian state debt will decrease to 68.1 percent of the GDP from 73.3 percent. Meanwhile, it will go below 60 percent by 2027.

Fitch expects the Hungarian National Bank will start its 13 percent base interest rate reduction program in 2024. That means, by end-2024, the base interest rate will be around 5-6 percent. That may affect the forint exchange rate since the current high interest rate protects the forint against the euro. It seems that protection will remain until the agreement with Brussels is signed (probably after the June 2024 EU elections), and the EU allocations begin to flow in Hungary. After that, the EU money will protect the forint’s exchange rate.

In a statement issued after the affirmation, the Finance Ministry said Fitch had favourably assessed the government’s policy of deficit and debt reduction, Hungary’s high investment rate and the stability of the banking system, while pointing to a reduction in inflation to the single digits by year-end, MTI wrote.