A strong forint is good for ordinary Hungarians who receive their monthly net income in the national currency. It helps reduce grocery prices and makes imports cheaper. However, it is less favourable for many players in the Hungarian economy who based their development plans on a weaker forint. What can we expect?
Hungarian forint as strong as 4-5 years ago
Currently, the Hungarian forint stands at 361.11 against the euro, and it has not been this strong for more than four years. The last time the exchange rate was below 360 was before the Russian invasion of Ukraine.
Meanwhile, we have to pay only a little more than 310 forints for one US dollar, although the rate fell below 300 just a few days ago. The last time the forint was this strong against the US currency was in October 2021, almost five years ago.
Experts agree that the main reason for the strong forint is the victory of the pro-European Tisza Party, led by Péter Magyar, which formed a supermajority government and aims to bring home frozen EU funds and become a constructive member of the European Union, rather than a disruptive force. Another factor is the “Trump effect”, which deliberately weakens the US dollar to improve the export competitiveness of American businesses.
Strong currency painful for many
According to G7, a Hungarian economy-focused media outlet, the strong forint is becoming a significant burden for many participants in the Hungarian economy. Those most affected are export-oriented companies that based their growth plans on a weak forint (and low wages). On the positive side, interest rates on Hungarian government bonds are falling. Therefore, even a 4% rate is not inconceivable, compared with the current 5.1%.
András Kármán, the new Finance Minister in the Tisza government, said that a supplementary budget will be ready by the summer, and the 2027 budget will be finalised by the autumn. This means the Magyar government can adopt next year’s budget within the current year, as the Orbán government did previously.
The Finance Minister has promised to phase out extra taxes gradually. Family allowances will remain, there will be a VAT reduction this year, but personal income tax cuts will only take place next year. The so-called KATA tax will also become accessible to a broader range of individuals and businesses, albeit not in its original form. Kármán said the financial basis for these measures will be reduced corruption, cuts to the propaganda budget, unlocked EU funds, and economic growth. However, he added that it will take another one and a half months to clearly assess the financial situation inherited from the previous government.
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National Bank governor: Eurozone accession not ‘end in itself’
Meeting the criteria necessary for joining the eurozone is in Hungary’s interest, but adopting the common currency should not be seen as “an end in itself”, Mihály Varga, the governor of the National Bank of Hungary (NBH), said at a conference in Budapest on Monday.
Opening the 11th Lamfalussy Conference, Varga said the time for Hungary to join the eurozone would come when the country’s economy could maximise the benefits of adopting the common currency, while minimising the risk stemming from a fixed exchange rate mechanism and a unified monetary policy.
Achieving and maintaining price stability remains the primary goal of the NBH, while strengthening financial stability and economic resilience are also important tasks, he said.
He noted that CPI had been brought down to the central bank’s 3pc +/-1pp tolerance band, while the forint had firmed from around 410 to under 360 against the euro.
Adam Glapinski, the head of Poland’s central bank and the recipient of this year’s Lamfalussy Sandor Prize, pinned the decline in Europe’s economic weight and competitiveness on overregulation and high energy prices.
Martin Kocher, the governor of Austria’s central bank, said the euro had become one of the most important currencies in the world over the past 25 years and was now an important stabilising factor in the European economy. The lecture series is named after the Hungarian-born Alexandre Lamfalussy, the “father of the euro”.
Another from our business-related news: New store opening: UK retail chain launches first franchise in Hungary
Featured image: deposiphotos.com
While I’m no economist I do have an active interest in economic matters and have previously worked in banking. Prior to the election I didn’t anticipate the degree to which the Forint would strengthen, nor the 200 basis point decline in the implied yield on 10Y government paper. There’s now a mere 50bp separating 10Y UK Gilts and the equivalent Hungarian debt which is unprecedented (and also speaks to the relative lack of market confidence in the UK). Both changes are extraordinary in their magnitude and reflect international market relief after the change of government as well as a general expression of confidence in the new government’s competence. The aggregate effect of the strengthened Forint and the whopping decline in the implied yield on bonds is huge for a country like Hungary that’s only heavily indebted, but also one with a debt burden that is/was expensive to finance. Prior to the election Hungary was spending more on debt interest as a % of GDP than any other EU country which was crippling for the national budget.
Factor in the hotly anticipated arrival of EU funds, the majority of which represent non-refundable grants and the combined effect will be a huge shot of adrenaline for the Hungarian economy. The stronger Forint undoubtedly causes difficulties for exporters but even at the new pricing level Hungarian wages remain low compared to not only western Europe but also some of its regional peers which is one of the advantages of seeking to grow from such a low base.