Hungary - USD LCU Index January 1, 2022 = 100

The HUF regains some strength amid positive signals of a political settlement, but risks remains acute

While the HUF has seen a significant boost amid signs the government is set to amend some of its more controversial pieces of legislation in a bid to unlock EU funding, MNCs should not feel complacent. Risks to the outlook persist, and the recent downgrade of Hungary’s credit rating reflects worsening macroeconomic conditions on the ground. Added to these pressures, policy unpredictability will continue to weigh on the operational environment, and further hikes in sectoral taxes, which will severely affect MNCs’ bottom-line growth, remain possible should the government fail to secure the necessary funding.


  • Amid deteriorating macroeconomic conditions, S&P has downgraded Hungary’s credit rating to BBB- from BBB with a negative outlook.
  • Hungary plans to use the EU Recovery and Resilience Facility’s credit line to boost investments in the energy sector and speed up its energy diversification.
  • The government has outlined plans to change the controversial higher-education legislation that has allowed it significantly greater control over university appointments.
  • Hungary’s central bank announced its intentions to maintain higher rates for longer, providing a significant boost to the forint.

Our View

Hungary’s government will need to perform a careful balancing act going forward, considering the sharp deterioration of the market’s previously resilient macroeconomic fundamentals. Inflation reached 24.5% YOY in December 2022 and is expected to peak through Q1 2023, as the previously introduced sectoral taxes and the substantial scaling down of support measures will ensure that price pressures will drive the market into a recession that will last through Q3 2023. Despite plans to cut the deficit to below 3.9% of GDP in 2023, the drop in activity and existing spending commitments likely mean that the government will be unable to meet its targets, and the deficit will likely stand at around 4.5% of GDP at the end of the year. The recent downgrade of Hungary’s credit rating, combined with the central bank’s hawkish stance, will add additional woes to the government’s ability to tap into additional external finances and sustain its previously ambitious public investment program.

It is not all doom and gloom, however, and there is a potential for an upside, in which the market can even potentially avoid a full-year recession. The government’s announcement that it will seek to tap into the Recovery and Resilience Facility’s credit line and draw on EUR 9.5 billion—despite previous announcements that it will not do so—and plans to revoke some of its most controversial bills to unlock available funding shows a clear realization that the fiscal situation needs to be addressed urgently. The latter message has also reversed some of the HUF’s weakness and provided a significant boost to the currency. However, even in this endeavor, the government will need to continue its balancing act and avoid alienating key supporters, who may interpret this as an admission of defeat. One way of placating domestic supporters is by sending ambiguous messages about Hungary’s support for Ukraine, though that risks further alienation with the rest of the Visegrad Four countries, and more significantly Poland. Raising politically sensitive topics, such as LGTB rights, on the other hand, risks further aggravating relations with the EU and the European Commission, which may, in turn, refuse to unlock funding.

We still believe that Hungary will eventually receive access to the funding by the end-of-year deadline, but it will need to introduce additional changes to appease European partners. Should funds be unlocked quicker, however, it is possible that the market could avoid a full-year recession and the recovery would start as early as the end of Q2 2023. Yet, failure to unlock the funding would translate into a much more severe recession that would last well into 2024.

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