EcoTV Week

Hungarian Forint: under selling pressure

10/21/2022

The Hungarian forint is amongst the worst performing currencies in Central Europe since January 2022. The forint has respectively lost 11 and 23 % of its value against the Euro and the dollar. The Central Bank of Hungary even intervened last week to shore up its currency. Why is the forint more affected than other currencies in the region? A few explanations below.

Transcript

The Hungarian forint is amongst the worst performing currencies in Central Europe since January 2022. The forint has respectively lost 11 and 23 % of its value against the Euro and the dollar. The Central Bank of Hungary even intervened last week to shore up its currency.

Now, Why is the forint more affected than other currencies in the region?

Well aside the Dollar’s upward march, which mechanically pushes other currencies to depreciate, specific factors to the country tend to magnify downward pressures.

First of all, this depreciation can be explained by markets’ overreaction. The recent episode of volatility comes after the authorities announced a recalibration of their monetary policy. In fact, the Central Bank of Hungary indicated that it is putting an end to its policy rate hike cycle. This decision was perceived as premature given that inflation is still accelerating.

Second explanation, well Hungary is perceived by markets to be amongst the most vulnerable countries in Central Europe due to the consequences of the war in Ukraine. Indeed, Hungary is highly dependent on oil and gas imports from Russia.   

Third reason, the current account has worsened significantly since January 2022 due to higher energy costs.  Besides, foreign exchange reserves alongside with the import coverage ratio are structurally low even if Hungary’s membership in the European Union limits liquidity risks.

The budget deficit is also pronounced. The official target of 4.9 % of GDP for 2022 has nearly been reached in August.

Regarding capital flows : Hungary has experienced a significant amount of portfolio outflows over the past 8 months cumulatively.

Last but not least, there are concerns related to the temporary suspension of EU Recovery funds. Besides, the conditionality mechanism that has been activated by the EU last April may also affect funds allocated to Hungary within the European Budget for 2021-2027. Negotiations between Victor Orban’s Administration and EU are still ongoing.

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE