The HUF's performance has decoupled from other European currencies amid rising fiscal risks

Failure to secure EU funding would mean a steeper recession and an effective collapse of the forint

Despite Hungary’s strong performance in H1 2022, a series of policy blunders, excessive public spending, and political isolation have exacerbated powerful macroeconomic headwinds, which will drive the market into a contraction. MNCs should note that access to EU funding is vital to the Hungarian economy in 2023, and should the government fail to secure it, demand across all customer segments is set to see a much sharper decline. Additionally, executives should be mindful of existing sectoral taxes and the willingness of the government to transfer its fiscal woes onto the business sector, which may make financial and strategic planning much more difficult.


  • The European Commission (EC) previously recommended the suspension of EUR 7.5 billion of cohesion funding (65% of total).
  • The EC approved Hungary’s EUR 5.8 billion recovery program, but the release of the funding is contingent on the implementation of broad anti-corruption reform.
  • The EU will hold a discussion on December 19 to evaluate Hungary’s proposed reforms and decide on how to proceed with the available funding.
  • In response, Hungary vetoed an EUR 18 billion EU support package for Ukraine in a bid to increase pressure on the EU to unfreeze recovery funding.
  • Despite the veto, the EU parliament has agreed on alternative mechanisms to provide the funding to Ukraine through member states’ budgets, rather than the EU budget, increasing pressure on Hungary to address outstanding issues.

Our View

It is difficult to overstate the dire situation of Hungary’s economic and fiscal outlook, especially in light of the 10% of GDP deficit, registered in the January to November 2022 period. While the government has hiked the windfall tax to 95% on extraordinary profits for oil companies, reflecting the spread between the prices of Urals and Brent crude oils, and has suspended the fuel price cap, massive pre-election expenditures and the need to support the economy will continue to cloud the fiscal outlook. Economic headwinds have been compounded by the rapid increase in inflation, which will likely reach 25–26% YOY in Q1 2023, and the sharp deterioration in households’ incomes, which will drive a pronounced contraction in domestic consumption. All of this is happening against the backdrop of a hawkish monetary stance that has seen the key policy rate reach an eye-watering 13.0% by December 2022, and which will likely be increased further, as the central bank re-evaluates its forecasts for 2023. Additionally, the HUF has failed to see the broad rally that other European currencies have seen in the past few weeks and remains effectively the worst-performing currency in the region despite the central bank’s hawkish stance.

The current situation has made it apparent to the ruling Fidesz party that Hungary is in urgent need of access to both its COVID recovery and cohesion funding and has prompted Budapest to signal its willingness to introduce some anti-corruption reforms. However, many of the current reforms have not only been deemed cosmetic, but the government’s recent attempt to block EU support to Ukraine has angered Hungary’s European partners. The failed attempt to hold the EU hostage will thus require the government to commit to much more comprehensive reforms, but the limited time it has to do so clearly presents numerous risks to the outlook. While we continue to assume that cooler heads will prevail, and that the economy’s untenable position will force the government to accept the EU’s terms, risks clearly remain to the downside. Faced with high levels of inflation and an imminent recession, public discontent is likely to see a pronounced increase, with the ongoing teachers’ protests likely to expand. While this is not to say that PM Viktor Orban’s government will fall, it will make effective governance much more difficult and likely require the use of repression against protesters, which will further curtail investor sentiment.

Ultimately, failure to secure the funding would translate into a much steeper recession and an effective collapse of the HUF, which could easily fall north of 500 to the USD (from 394.5 currently). Additionally, both public and private investments are set to see a steep contraction that will feed into a rise in unemployment and prevent a rebound in 2024.

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