Forint Under Pressure as Moody’s Downgrade Adds to Economic Challenges

Hungary's currency, the forint, has faced a turbulent year, losing over 7% against the euro so far in 2024. Global financial uncertainty has turned investor attention to the country's economic vulnerabilities, forcing Hungary’s central bank to halt its monetary easing and maintain the EU’s highest borrowing cost, tied with Romania at 6.5%.

The latest blow came with a downgrade of Hungary’s sovereign outlook by Moody's, shifting from stable to negative. The credit rating agency cited concerns over the prolonged freeze on EU funds and the deteriorating external economic environment. This marked the first change in Moody’s assessment of Hungary in three years, signaling growing pessimism about the nation’s financial trajectory.

Although Moody’s kept Hungary’s credit rating unchanged at 'Baa2'- an investment-grade level - a negative outlook increases the likelihood of a downgrade within 6-24 months. A step down to 'Baa3' would leave Hungary just one notch above speculative or “junk” status under Moody’s rating scale.

The agency highlighted that Hungary’s economic and fiscal risks stem from governance issues and institutional weaknesses. A critical concern remains the potential loss of access to significant EU funding, tied to conditions on rule-of-law reforms. Moody’s noted that governance under Prime Minister Viktor Orbán, often criticized for eroding democratic norms, has exacerbated these risks.

The forint has been central Europe’s worst-performing currency in 2024, falling over 7% against the euro this year. Over five years, this translates to a 23% depreciation, with a staggering 35% loss over the past decade. Recently, the currency fell to over 415 per euro, nearing a two-year low. Pressures included a strong U.S. dollar, geopolitical uncertainties, and market reactions to Donald Trump’s victory in the U.S. presidential election, as prospects of trade tariffs bolstered the dollar.

Analysts, surveyed by Reuters, predict a partial recovery in the coming months but expect the forint to weaken again, forecasting an exchange rate of 414.7 per euro within a year. This marks a significant downgrade from previous projections of 405 per euro.

"Technically, the forint is very oversold at the moment, which is why we expect a technical correction as we approach the end of the year," Mariann Trippon, an analyst at CIB Bank told Reuters. However, she cautioned that uncertainties in early 2025- such as potential U.S. trade tariffs and a leadership change at Hungary’s central bank- could renew downward pressure on the currency.

Prime Minister Orbán has nominated Finance Minister Mihály Varga as the next central bank governor, sparking investor concerns that an Orbán-aligned majority in monetary policymaking could lead to aggressive rate cuts. Critics argue this could undermine financial stability, particularly with the government seeking to boost growth ahead of the 2026 elections.

The central bank has maintained the region's highest real interest rates to stabilize the currency and mitigate financial risks. However, this hawkish approach has drawn criticism from government officials, including Economic Development Minister Márton Nagy, who called the 3% real interest rate excessive, citing its negative impact on lending, investment, and growth.

Economists at ING Bank in Budapest warned that the EUR/HUF exchange rate remains a critical issue for Hungary’s financial stability. “The HUF has fallen from an already weak position into a global view, creating challenges for its potential recovery. Positioning is probably a bit softer than before the election but still clearly short HUF,” they stated in a report.

With Moody's warning of heightened risks and the forint under sustained pressure, the path to recovery remains uncertain.