Hungarian forint: a glance at the reasons for the selloff

The Hungarian forint has been one of the weakest performing currencies worldwide amid an international selloff. Despite government reassurances that the fundamentals of the Hungarian economy are strong and sound, the forint remain under massive pressure. Diplomacy&Trade takes a look at the specific reasons behind the forint’s underperformance and how the currency’s weakness threatens the government’s economic and fiscal objectives.

An explosion in international natural gas prices lies at the root of the problem. The rise in prices, due to Russia’s invasion of Ukraine, set off a chain reaction at the end of which stands a massively oversold forint.

Recession and politics
Markets are growing increasingly weary of economic recession in the European Union. This fear, compounded by the European energy crisis and runaway gas prices were the factors that fundamentally overturned the forint market. In such a market environment, international investors and speculators identify the currencies with vulnerable economic fundamentals.
As international investors began to price in higher risks at the beginning of the week, due to the intensification of recessionary fears, it triggered a market panic and the dollar started to strengthen. Given that Europe has shakier economic foundations due to the unfolding energy crisis and the overall state of major European economies, investors started selling off European assets, which further boosted the strength of the dollar against all major global currencies, including the euro.
A strong dollar and a weakening euro are an explosive combination for emerging markets currencies such as the forint, economists said. In such a situation, the forint practically moves in tandem with the EUR/USD cross, Raiffeisen Bank chief economist Zoltán Török told financial news portal portfolio.hu. This underscores the fact that the root of the problem lies in Europe, the analyst noted. He added, however, that the Czech koruna was largely stable over the past week and the Polish zloty weakened much less than the forint, which shows that there are country-specific factors behind the recent forint selloff. Hungary’s high debt ratio and its reliance on energy-intensive industrial sectors such as car manufacturing are all factors that works against the forint in the current market environment.
The government’s continued standoff with the European Union over a range of political and economic issues is also a cause of worry for investors as Hungary remains cut off from vital EU funds.

Regional underperformer
Hungary is emerging as the most vulnerable economy in the central and eastern European region. Its debt ratio is very high, meaning that it needs external funds to finance itself, Prime Minister Viktor Orbán runs a government that refuses to seek compromises on political matters, the current account balance is continuously deteriorating and state-mandated price caps on fuel and certain food items are deemed unsustainable by investors.
The government’s policy of keeping households’ utility costs under a certain level is causing massive deficits in the central budget to the tune of hundreds of billions of forint. Even though the government has announced a major fiscal rebalancing plan, which relies mostly on sector-specific windfall taxes, investors believe the program is insufficient to keep Hungary’s budget deficit on track.

Central bank measures
The National Bank of Hungary has delivered a series of interest rate hikes to defend the forint, making it the most hawkish monetary authority in the European Union. However, the central bank alone will not be able to put a floor under the sliding currency, economists said.
Péter Virovácz, economist at ING Bank in Budapest, believes that the central bank has taken the right measures under the current circumstances, but its policy tool set and mandate are not sufficient to reverse the selloff in the Hungarian currency.
The latest 200-baiss-point interest rate increase from the central bank failed to stop the weakening of the forint, which clearly shows that the ball is now in the government’s court.
Unless Prime Minister Viktor Orbán strikes a deal with Brussels and eliminates some of the most controversial economic measures (price caps and sectoral taxes), the forint will remain in the storm’s eye every time there is turbulence on international markets.