S+P Global Ratings affirmed Hungary’s BBB- sovereign rating with a stable outlook at a scheduled review on Friday.
“The stable outlook reflects our view that Hungary’s small open economy is steadying after a series of external shocks,” S+P said in the rationale for the rating action, noting a shift by policymakers to tighter monetary and fiscal settings. The growth outlook beyond 2023 “remains healthy”, it added. The Finance Ministry said the rating action signals S+P’s confidence in the Hungarian economy, MTI added. The investment grade rating is also an acknowledgement of government measures to improve balance indicators, it added.
Világgazdaság wrote that the forint’s decline in the last few days was because investors expected a downgrade from S+P. However, remaining in the BBB- means that the three big credit rating agencies held Hungary in the “recommended for investment” category. The Hungarian government-close newspaper added that might be because Hungary is past the hardest crisis period.
The Hungarian national bank introduced new forint coins to commemorate the 300th anniversary of creating the Hungarian National Archives and the 100th anniversary of building its headquarters in Buda Castle. Furthermore, they issued a new coin respecting one of the popular Hungarian folk tales. Here is how they look.
According to pestbuda.hu, one side of the coin depicts the “chest of the country” in which the monarchs’, aristocrats’ and counties’ documents were kept. The other side of the coin has the building of the central archives designed by Samu Pecz. Now, the Hungarian National Archives hold 90 kilometres of documents.
The institution has been introducing commemorative coins since 1969, Barnabás Virág, the bank’s deputy head, highlighted in a press conference. The bank issued silver coins (HUF 15,000, EUR 39) and their non-ferrous metal counterpart (HUF 3,000, EUR 7.8). The designer of both coins was Gábor Kereszthury. Here is a photo of them:
New forint coins commemorating Hungarian folk tales
There are two types of the silver type coin: proof (7,000 pieces) and BU (7,000 pieces). Interestingly, the silver coin depicts the Hungarian National Archives with its original spire. However, the spire’s colour is different because it does not exist now. It was dismantled after WWII since it suffered too much damage during the siege of Budapest, the second-longest siege during WWII after Stalingrad.
István H. Németh, a Historian of the national archives, said we know little about the so-called “country chest”. The palatines kept it safe, and it held, for example, copies of international contracts. The first Hungarian national archive (Archivum Regni) was created in 1723, starting operation in 1756.
The other forint coin introduced by the Hungarian national bank depicts one of the most famous Hungarian folk tales titled “The Salt”. It is made of non-ferrous metals (Cu, Zn, Ni). The designers are Fanni Vékony and András Szilos, and it is worth HUF 3,000 (EUR 7.8). It is the third member of a series of commemorative coins to present Hungarian folk tales. The program began in 2021.
That is what a Hungarian tourist paying an early-summer business visit to Russia told Blikk, a Hungarian tabloid. They said Hungarians swarm Putin’s country despite the sanctions imposed on travel and other aspects introduced by the European Union.
One of the travellers told Blikk that it is not easy to get to Russia but not impossible either. Russians accept dollars and euros, and even forints because there are a lot of Hungarian tourists visiting the Eastern European country currently at war with Hungary’s eastern neighbour, Ukraine.
Despite there being no direct flights between Russia and Hungary, you can easily land in Saint Petersburgh or Moscow from a Turkish or Middle Eastern country’s airport. Of course, you must obtain a passport, visa and a negative PCR test done in the previous 48 hours.
Péter came home from a three-week-long journey in Russia. That is not his real name, and he did not want Blikk to write his occupation either. He said a Hungarian travel agency did the paperwork for the visa. He travelled by plane to Helsinki and took a bus to Saint Petersburg. Afterwards, he travelled to Moscow by train. Border guards are friendly, provided everything is OK with the papers, they do their job.
The EU-Russia border sees Russian and EU licence plates either, and Russians receive EU tourists warmly. When you enter Russia, you get a “migration card”, which you must keep in your pocket during your entire stay. Apart from that, you are free to do whatever you want.
There are a lot of Hungarians in Russia for business and travel reasons. Tourism is at a peak in Russia, locals accept euros and dollars, but they are happy to get forints, even happier than getting dollars for some reason. Provided your debit or credit card does not work, Russian banks give you tourist cards immediately. Péter said he spent four nights in a business room of a 4-stars Moscow hotel and spend less than EUR 310.
The Hungarian Ministry for Foreign Affairs did not answer Blikk’s questions concerning the number of Hungarian tourists in Russia. Before, they advised Hungarians to travel to Russia only if it were inevitable. In that case, they asked them to register for consular protection.
Motorists can expect to pay more than HUF 600 (EUR 1.59) for fuel this autumn. This will be influenced mostly by the increase in excise tax and the expected weakening of the forint.
Drastic increase in fuel prices soon
According to a recent forecast by GKI Gazdaságkutató Ltd., the price of a litre of fuel will rise to over HUF 600 (EUR 1.59) by the autumn. Next year, the average price will be HUF 650 (EUR 1.72). GKI also expects the forint to weaken and the excise tax to rise. Motorists will have to pay HUF 41 more tax per litre next year, rtl.hu reports.
The excise tax increase was voted by the governing majority in Parliament on Tuesday. Moreover, according to the GKI, the single-digit inflation in December could reach double digits again in January, precisely because of the rise in fuel prices.
Right now, the average price of petrol is HUF 574 (EUR 1.52) per litre, while diesel is HUF 561 (EUR 1.49). This is roughly 20 percent higher than a year ago, when there was a price freeze on fuel.
Why increase the excise tax?
A week ago, the government submitted a draft proposal to increase excise tax on fuel. The Orbán government has argued for common EU rules. Meanwhile, the increase of HUF 41 per litre is almost double what would be mandatory. Why, Gergely Gulyás, the PM’s chief of staff, explained two weeks ago:
“We are already around the minimum level. So with the current increase we are still around the minimum level set by Brussels.”
GKI expects fuel prices to rise this autumn, as they believe oil prices could rise and the forint weaken. They say inflation could also fall below 10 percent in Hungary by December. However, they believe that the first few months of next year could see money depreciation jump back above 10 percent due to expected fuel price rises.
The exchange rate of the Hungarian currency is steadily losing value day by day. Although, there was a bit of hope for strengthening a week ago. This is not only bad news for investors but also casts a dark shadow over the future of EU funds due in the autumn.
As we have reported HERE, forint had a huge strengthening potential last week. The Hungarian National Bank (MNB) took extraordinary measures to support the stability of the forint. For a while, these actions seemed to work and the Hungarian currency strengthened from 430/EUR to 370/EUR. As the forint was constantly getting stronger, there were high hopes for it to reach the 340/EUR zone soon. However, the forint has been showing a weakening tendency in the last couple of days. On Monday, it fell back to the 375/EUR zone.
Weak exchange rate
Portfolio reported that the Hungarian forint has had a weak exchange rate for days. After a weak exchange rate on Monday evening, the forint still does not show a big strengthening. On Tuesday, the exchange rate was 374.5/EUR. This showed a minimal strengthening of 0.2 percent. On Monday, the exchange rate even passed the 375/EUR level. The weakening has been going on for days. The forint rates went from 370/EUR to over 375/EUR in just a couple of days. It appears that there is no particular reason behind this quick fluctuation. It is likely though that the positive performance of the USD might have affected the forint rates as well. Currently, the forint’s exchange rate is 343.25/USD and 436.2/GBP. As Portfolio writes, the market is now in a wait-and-see mode. There is a prospect of recovery once the new inflation data and S&P’s credit rating review are published on Friday. However, we should get our hopes up.
Other currencies
The two regional competitors of the forint, the Polish zloty and the Czech crown, have shown a minimal strengthening of 0.1 percent on Tuesday morning. However, the Turkish lira is getting weaker again. It has shown a weakening of 0.2 percent on Tuesday morning. The currency has been on a downhill tendency for weeks now. The Russian ruble has strengthened by 0.3 percent. As mentioned earlier, the weakening of the USD has come to a halt. The exchange rate against the euro did not reach the key level of 1.10. Currently, it is around 1.09, which matches the rates of Monday evening. Meanwhile, he Japanese yen firmed by 0.2 percent, while the British pound by 0.1 percent against the USD.
The Hungarian forint has experienced a remarkable turnaround this year, following its historic low in the previous year. Since the beginning of 2023, the currency has appreciated by nearly 7 percent against the euro and 8.3 percent against the dollar.
Although the Hungarian National Bank (MNB) started reducing the policy rate in May, it did not weaken the forint significantly. This was due to the continued high interest rates in Hungary, writes Portfolio.
Behind the scenes
Reports from the market indicate that the benchmark interest rate increase to 18 percent has made the forint one of the most sought-after investments. Not only in the region, but globally as well. The high interest rate level presents favourable conditions for carry trades, enabling investors to benefit from significant interest rate differentials even without significant exchange rate fluctuations.
The substantial strengthening of the forint cannot be solely attributed to the high interest rates. Other contributing factors include positive international sentiment, the depreciation of the dollar and the decline in global natural gas prices over the past six months. Improved investor sentiment towards emerging markets and the favourable external position of the Hungarian economy, which heavily relies on energy imports, have also played significant roles.
Hungarian forint on the roll
Since last October, the forint has emerged as one of the world’s preferred investments. The currency has witnessed a nearly 20 percent increase against the euro from its lowest point. The performance of the forint this year further confirms its exceptional performance, surpassing most other currencies.
Over a six-month period, the forint strengthened by 8.3 percent against the dollar. It was second only to the Mexican peso, which experienced a gain of over 12 percent. The Brazilian real ranks third, followed by the Polish Zloty, which is one of the main competitors of the forint.
Although the forint’s performance over the last three months is not as outstanding, it still ranks seventh among mid-range currencies. This may be attributed to the fact that the euro-for-euro exchange rate reached a significant support level at 370. Furthermore, the MNB had already hinted at upcoming interest rate cuts in the previous month, with the first cut occurring in May.
What’s next?
Recent weeks have indicated that the Fforint’s strengthening may have reached a plateau. The currency may stabilise at around the 370 level and trade within a narrow range. According to analyst expectations, the MNB could set the base rate at 13 percent in September. This would still be almost double that of regional peers.
Nevertheless, risks remain for the forint, particularly concerning the fate of EU funds, which could present challenges in the second half of the year. If no agreement is reached, investors may refocus on this issue. This could potentially lead to the end of the forint’s upward trajectory, alongside further interest rate reductions.
Hungary implemented large fiscal and monetary stimulus measures during the COVID-19 pandemic and in the run-up to the parliamentary elections in April 2022.
While the government has changed course after the elections and now targets a marked narrowing of its large budget deficit, this commentary argues that a lasting repair of fiscal accounts is complicated by repercussions of previous stimulus measures in two important ways. First, fiscal stimulus measures prior to the elections have partly raised budgetary pressures in a structural manner as they comprised not only one-off but also permanent measures. Second, the very loose fiscal stance of the government contributed to a strong overheating of the Hungarian economy during the first half of last year which, in turn, necessitated a very large increase in domestic policy rates. As a result, the interest burden of the Hungarian government is set to rise markedly over the next few years.
Key Highlights
Reaching the 2023 deficit target is complicated by cyclical headwinds and permanent spending increases and tax cuts from previous stimulus measures.
The interest burden of the Hungarian government is projected to increase more strongly than those of other EU countries.
The comparatively strong increase in domestic interest rates can partly be ascribed to the government’s very expansionary fiscal stance in early 2022 as the latter contributed to a strong overheating of the economy.
“The Hungarian government’s still elevated budgetary pressures stem from both the cyclical downturn of the economy and structural spending increases in the run-up to the April 2022 parliamentary elections,” said Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar.
“Moreover, the government’s overly loose fiscal stance in early 2022 contributed to a significant overheating of the economy which has come back to haunt public finances through a rising interest cost burden.”
As we wrote, many things change in the Hungarian supermarkets from 1 July. One of the changes is that from today, you can withdraw some money at the cashier’s desk. However, the amount is limited.
We explained Hungary’s brand-new price monitoring system in detail in THIS article. However, that is not the only change concerning shops and supermarkets in Hungary. Today is the first day we can withdraw a maximum of HUF 40 thousand (EUR 107) per month at the cashier’s desk. The transaction is free.
According to telex.hu, in practice, the shop assistant will type the needed cash amount into the final purchase price. The government expects the new ‘cashback’ service will increase traffic in shops and supermarkets. It can be big help in small settlements where banks do not have an office or an ATM. As a result, you may withdraw HUF 190 thousand (EUR 510) instead of HUF 150 thousand (EUR 402) for free in Hungary from today. That is a 27 percent increase, a rate Hungary’s inflation almost reached this January-March. That is the highest in Europe. The opposition blames the government’s measures, while the Orbán cabinet regularly throws the ball to Brussels, the anti-Russia sanctions, Ukraine and the COVID aftermath.
Life has become much more expensive in Hungary in just one year. Therefore, you need much more money because, for example, food product prices increased by 40-50 percent or even 100 percent in some cases. Therefore, we can explain the new cash withdrawal system as a reflection of that change.
GKI Economic Research Co. forecasts a 19 percent inflation rate and a 0.5 percent contraction of the economy in 2023. The construction and retail sectors are expected to contract by 10 percent and 4 percent respectively. The average inflation rate of the euro will end up at around HUF 390. Interest rate cuts could dampen the forint’s momentum, making it difficult to achieve single-digit inflation by year-end.
GKI’s (GKI Gazdaságkutató Intézet) previous forecast in March differed from the consensus view. It projects a downturn, a slower decline in inflation, and potential delay in EU transfers. In June, GKI maintained its main economic forecast, expecting a 0.5 percent GDP contraction. Agriculture may contribute to preventing a larger decline, writes Pénzcentrum.
All-around decline
The recession of the economy continued in Hungary in Q1 2023, with GDP falling for the third consecutive quarter. Industrial production, construction and retail sales also experienced declines.
GKI revised its projections, no longer expecting industrial growth but rather a possible decline. The construction and retail trade contractions rose to 10 percent and 4 percent respectively. Housing completions are likely to be almost 20 percent lower than last year. Some service sectors may experience modest growth, while employment is to rise slightly with a marginal increase in the unemployment rate.
Consumption is forecasted to decline by 2.5 percent this year, with a 3.5 percent decrease in purchased consumption. Average gross earnings rose in April but resulted in a decline in real earnings due to price increases. Earnings growth for the year is likely around 16 percent, leading to a real earnings loss. Real earnings may begin to rise by the end of 2023.
Public investment was frozen and rescheduled, leading to a reduction in the number of infrastructure-related developments. The 2023 budget faced challenges due to overoptimistic growth forecasts and delayed EU transfers, resulting in a cash deficit exceeding the annual target. The debt servicing costs are a concern, and a deficit overrun of up to 1.5 percent of GDP could occur without corrective measures.
Reliance on the EU
The forint’s strength has been influenced by the high benchmark interest rate, but the rate cut cycle could reverse this trend. Uncertainty surrounding EU negotiations and Hungary’s economy policies may weaken the forint. Inflation will remain high, but a single-digit increase by year-end is possible.
EU transfers have been minimal, and GKI does not anticipate significant transfers this year. The government went with a crisis management approach of austerity without reform, with tax increases, subsidy cuts and state intervention in market processes. The lack of strategic thinking and neglect of important sectors may lead to funding problems and a relatively high inflation rate.
GKI predicts limited EU transfers this year and emphasises the importance of reaching an agreement with the EU for confidence and funding.
On Wednesday, the Hungarian forint weakened against the major currencies compared to its early morning quotation in the interbank foreign exchange market. At the same time, it seemed that investors turned away from the currency: and they have a good reason.
Slightly weakening forint
The euro rose to HUF 371.19 by 8:30 PM from HUF 370.27 early in the morning. The dollar was quoted at HUF 339.90, up from HUF 338.11 in the morning. The Swiss franc was at HUF 379.33 after HUF 378.16 earlier, napi.hu reports.
The Hungarian forint weakened by 0.2 percent against the euro, 0.5 percent against the dollar and 0.3 percent against the Swiss franc.
Taking profits ahead of US inflation data
According to currency market experts, investors are taking profits from the region’s currencies ahead of the release of US inflation data on Friday.
Since the start of the year, the Hungarian currency has strengthened against all three currencies, gaining 7.1 percent against the euro, 8.7 percent against the dollar and 6 percent against the Swiss franc.
As it seems, the Hungarian forint got through its critical stage. After last year’s plunge, it has been showing an upward trend due to the Hungarian National Bank’s measures. The Hungarian National Bank (MNB) tried extraordinary measures, like interest rate hikes, to support and secure the stability of the Hungarian currency.
During its lowest period, one euro was worth more than HUF 430. By April, the forint strengthened and reached the 370/EUR zone. Napi.hu reported that for the last couple of months, the forint exchange rate has been stable. However, there are speculations about whether it has reached its equilibrium exchange rate or maybe it will show an even more expressive strengthening. Earlier, we reported that there might be hope for forint to reach the 340/EUR zone, which you can read about HERE.
Past tendencies
The strengthening from 430/EUR to 370/EUR has effectively made up for the currency’s decline from the previous year by making it one of the strongest strengthening currencies of the year. It encountered resistance at the 370 zone, which was the forint’s lowest point during the Covid pandemic. The currency often reached this zone, but it always recovered from it, although it did not make up for the weakness of the previous two years, particularly the pandemic year of 2020. This level is presently a boundary within the contradicting, more grounded heading, as is habitually the case in technical analysis. The exchange rate is attempting it for the fourth time so far. But each time, it has always reversed to the weak direction, in spite of the fact that the drops have gotten smaller and smaller.
Is there hope?
As we have reported HERE, the forint was not able to perform a breakthrough from the 370/EUR zone during its third attempt. The third breakthrough only showed a very minimal strengthening. Now, the fourth attempt might become a very significant milestone in the forint’s exchange rate history. If a breakthrough did happen from the 370/EUR zone, it would probably be a much bigger and further strengthening. The next stop for forint would be the 340-345 zone, which is quite impressive. If this were to happen, it would be fundamentally justifiable, as it only reached that level between March 2020 and around the beginning of 2022.
Economic background
Of course, the country’s economic situation has a key role in the changing of the forint’s exchange rate. The most fundamental basis of the exchange rate is the external balance. Within this, the current account balance has improved significantly compared to last year. This year is still showing a deficit, but much smaller than was expected by Hungarian National Bank and the government. In addition to that, the external balance is in a surplus thanks to strong exports and lower energy prices.
Conclusion
There is no real guarantee of reaching the 340/EUR zone. The Hungarian National Bank might approve the current balanced state of the forint. Therefore, further measures will not be made for some time. However, the breakthrough might come finally in the next couple of days. In any case, the next few days could be decisive for the future direction and the fate of the Hungarian currency.
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.
The Hungarian forint’s fourth “peak attack” can be decisive regarding the Hungarian national currency’s future. If it were successful, that would enable the forint to remain permanently in the 340/EUR zone. The strengthening would mean that the forint could overcome the difficulties caused by the COVID pandemic and the war in Ukraine. However, until then, it has to reach milestones.
According to napi.hu, the Hungarian forint reached historic lows last autumn, one after the other. In October, the EUR/HUF exchange rate even went below 430, causing public outcry and political turmoil after the fourth landslide victory of Orbán in the parliamentary elections. Thanks to the drastic base interest rate policies of the Hungarian National Bank, the exchange rate could be stabilised by January. Ever since, the forint has been in constant strengthening. And it may reach a new milestone soon.
The forint reached the 370/EUR zone weeks ago, and it moved below that three times up until now. Napi.hu argues that is not a problem since, based on the rules of technical analysis, the fourth breakthrough may cause the most decisive change. In the case of the forint, such a move could result even in a permanent 340/EUR exchange rate.
Waiting for a new forint breakthrough
The third breakthrough took place on 9 June. We reported about that and the causes HERE. However, since the strengthening spanned only to 368-370, it does not mark a real breakthrough, the economic news outlet wrote. They shared a graph about the change of the forint’s exchange rate, which shows positive signs. After each strengthening period, the fallback was shorter, displaying the Hungarian national currency’s relative strength.
The fourth breakthrough should be more significant than the last three, napi.hu wrote. That is how it could change the zone of the forint. If that is not successful, the currency will probably stick to the 370/EUR level. A weakening is not likely because of the protective measures of the national bank and the fact that Governor Matolcsy regards it a priority to defend the forint against extreme currency exchange rate modifications.
National Bank Governor György Matolcsy and Finance Minister Mihály Varga: fighting against the inflation together:
The good news is that there is an export surplus, and the current account is balanced. Furthermore, thanks to the high Hungarian base interest rate, the forint is a perfect choice for investors. Finally, inflation is decreasing in Hungary despite still being one of the highest in Europe. Meanwhile, the lack of EUR billions from the EU and the government’s unfounded and quick modifications concerning finances in Hungary does not help the forint.
In Kecskemét, a man paid with fake money printed with a picture of George Soros for campaign purposes in a pub. The prosecution brought charges.
George Soros campaign money
The Hungarian Two-Tailed Dog Party had previously printed fake banknotes featuring current figures in Hungarian public life during a campaign. This is how George Soros ended up on the Hungarian 10,000-forint banknote.
Four years after handing out fake money, a man in Kiskunhalas, Hungary, paid in a pub with a banknote bearing the image of George Soros.
Mariann Négyessyné Bodó, spokeswoman of the Bács-Kiskun County Prosecutor General’s Office, said that the man was sentenced to one year and eight months of suspended imprisonment and a fine.
The incident happened last year, when the man with a criminal record was drinking with his friends in a pub in Kiskunhalas in April. The man paid for the drinks he ordered with fake 10 and 20 thousand-forint banknotes, 24.hu reports. The bartender refused to accept the payment with the fake money, so the offender caused HUF 30 thousand in damages.
George Soros was featured on the 10-thousand note and Jean-Claude Juncker on the 20-thousand note. They also had a different feel and did not contain the usual security features.
Penalty for the offender
The prosecutor said that the accused admitted his guilt and said he thought he would try it, and to his surprise, the fake money worked.
According to the man, he also drank the change with his friends in the pub. The prosecution asked for a suspended sentence of one year eight months and a fine for the man charged with the crime of counterfeiting.
The Hungarian forint has been doing quite well recently. However, for a few days now, it appears to be frozen and nobody knows which direction it will take next. When it is changing, it is changing only by the smallest bits. On Tuesday morning, the forint exchange rate was mixed. It is not yet possible to say which direction the Hungarian currency will take for the rest of the day.
The Hungarian currency weakened slightly against the euro and the Swiss franc on Tuesday morning compared to Monday evening. One euro was worth HUF 369.41 at 6.30 AM (369.29 at 9 AM), up from HUF 369.01 on Monday. Meanwhile, the Swiss franc rose to HUF 377.88 from HUF 377.64. However, the dollar fell to HUF 342.86 from HUF 343.33, Index reports.
Yesterday, we wrote that no matter what obstacle gets thrown in from of the Hungarian forint, it is still going strong. You can read more about the causes and reasons HERE. Furthermore, on 9 June, the currency strengthened to a one-year high and broke the nearest record: read details HERE.
The government did not inspire confidence with its intervention in the bond market. The fate of EU funds is very uncertain. Despite these factors, the forint is shaking off these concerns, whereas in the past, they would have weakened the currency.
There have been several events recently, which were supposed to make investors lose confidence in the strength of the Hungarian currency. Nevertheless, the forint is going as strong as ever. According to experts, there are good reasons for this, Forbes writes.
The negatives
The Hungarian government abruptly intervened in the savings market, with people being more and more pushed to purchase government bonds. Such steps, especially when taken without prior communication and consultation, do not strengthen investor confidence.
We are not making much progress in accessing the EU funds. Márton Nagy, Minister for Economic Development, recently spoke about the need to prepare for a scenario without EU funds. At the same time, Finance Minister Mihály Varga stated that the government has no backup plan in the 2024 budget in case the EU funds don’t come through.
The budget, filled with optimistic figures, is showing cracks, as it includes several tax increases. Market participants are increasingly monitoring whether the deficit will spiral out of control.
Meanwhile, the Hungarian National Bank (Magyar Nemzeti Bank, MNB) has begun its interest rate-cutting cycle. However, this process hasn’t been well-prepared and accompanied by consistent and tight communication.
Forint still going strong
Despite the aforementioned factors, which had always weakened the currency thus far, the forint unexpectedly strengthened to a one-year high against the euro on 9 June, with an exchange rate of HUF 367.69 per euro. The exchange rate has remained below the 370 level since then.
Sándor Jobbágy, the leading macroeconomic analyst at Concorde, said that they did not anticipate any significant impact on the exchange rate due to the MNB’s interest rate-cutting cycle.
“The MNB closely monitors market expectations and emphasises this in its commentaries. It cuts interest rates in line with the already priced-in level of rate cuts, accompanied by strict comments. Therefore, we expect that they will not surprise the foreign exchange market with larger-than-expected rate cuts,”
he said in an interview.
However, an important factor behind the strength of the forint is a trend that we talk about less often with the arrival of good weather and warmth. According to him, the development of European energy prices in recent months and the improvement in Hungary’s balance of payments have had a positive impact on the forint.
What does the future hold?
Jobbágy and his team do not anticipate any significant further strengthening of the forint compared to the current EUR/HUF levels, partly due to these factors.
“However, there doesn’t necessarily have to be a rapid weakening in the near term. For example, if the reference interest rate is reduced to the level of the base rate by autumn, the forint would still have a significant interest rate advantage over the euro and even the major regional currencies. By then, inflation, with a faster decline compared to the region, could reach around 10 percent by the end of autumn,”
The Hungarian forint broke records this week, reaching even 367/EUR. However, experts believe this trend will not last long since the national bank started to cut interest rates protecting the exchange rate. Meanwhile, the Hungarian government plans to increase the excise tax on fuel products, which will cost much more.
According to totalcar.hu, the Hungarian government said they must increase fuel prices from 1 January 2024. Otherwise, the Orbán administration would risk an infringement procedure against Hungary. That is because the EU has a minimum level of tax on each fuel product, and, currently, Hungary does not reach that. Even though Budapest asked for derogation (temporary exemption of the rule), the European Commission rejected the plea.
The result is that fuel in Hungary will cost much more. Here is how the tax will increase:
Gasoline: below USD 50/barrel from HUF 125 to 157.55; above USD 50/barrel from HUF 120 to 152.55
Diesel: below USD 50/barrel from HUF 120.35 to 152.9; above USD 50/barrel from HUF 110. 35 to 142.9
LPG: HUF 95.8/kg remains for road vehicles, while for other purposes, it will rise from HUF 12.725/kg to HUF 14.685/kg
Electricity: from HUF 310.5 to HUF 358.5 per MWh
In the case of gasoline and diesel, the increase will reach HUF 41 per litre, which is significant. As a result, Hungary will be among the European countries where fuel is one of the most expensive. If that happens, Totalcar suggests refuelling in Croatia, Romania or Slovakia, where it is much cheaper. For example, gasoline is now one of the cheapest in Romania in the continent (HUF 476-495/l).
Hungary has the 17th highest price regarding gasoline and the 10th highest concerning diesel. Following the price rise, Hungary will be 11th in the former and 6th on the latter list. Furthermore, it will exceed the Romanian, Slovakian, Austrian, Czech, Polish, Croatian and Slovenian average prices.
How long will the forint remain strong?
The Hungarian forint broke records this week going below 367/EUR, but experts believe the trend will not last long. That is because the national bank started to decrease the effective interest rate. The next session on the issue will be on 20 June, on which the monetary council will probably decide about another 100 base point cut. As a result, the forint will not be as attractive as it is now, so investors will take their money out of the Hungarian currency, index.hu wrote based on the remarks of a senior analyst of Equilor.
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On the other hand, there is a drastic gas price decrease, which stabilises the Hungarian economy. Gábor Regős, the analyst of the Makronóm Intézet highlighted that Hungary’s external balance and current account are better. Furthermore, inflation is decreasing, and the country’s export in the euro is rising.
Some experts talk about a 355/EUR exchange rate by summer, but Zoltán Varga does not believe that. The rate will be between 360 and 365, he said. The 350/EUR milestone can be reached only by, for example, a ceasefire in the Russian-Ukrinian war. But that is unlikely, considering the ongoing Ukrainian counterattack.
The Hungarian forint moved in a narrow range this week. It was unable to break free from the 370 EUR/HUF exchange rate level for long. However, the currency strengthened on Friday afternoon and climbed to a one-year record high.
Just a few days ago, we reported that the Hungarian forint hit a one-year high. On Wednesday, this record was breaking below the 368 EUR/HUF level. On Friday, the forint even went below 367.7, standing exactly at 367.69 at 5:40 PM, Index reports.
Inflation data was kind to the Hungarian forint
The most important factor in the strengthening of the forint was the May inflation data released on Thursday. The data showed that the consumer price index rose by 21.5 percent on an annual basis, while core inflation was 22.8 percent, Zoltán Varga, senior analyst at Equilor, pointed out to the Hungarian news portal.
“There are many positives to be taken from the data. On a monthly basis, food prices have stopped rising, while household energy has fallen by 3 percent as consumption declines,” the expert explained.
He added that the price of services continues to rise, with an increase of 0.9 percent compared to April.
