Page 67 - CE Outlook Regions 2023

Strengthening the capital markets in the region in 2023 remains a
priority for the local central banks which have spoken in 2022 of
integrating the three national markets into a pan-Baltic capital market, to
attract investors and give rise to a larger pool of liquidity.

5.3 Markets - Hungary

The Hungarian currency was by far the worst-performing currency in
the region in 2022 even as the central bank raised rates aggressively
throughout the year to combat rising inflation. The forint shed 9% of
value against the euro and 21% versus the dollar by mid-December.

The currency's slide accelerated in late September when the MNB
called an end to its monetary tightening policy after a 125bp rate hike,
above the consensus, even as inflation was still on the rise. The
EUR/HUF peaked at 434 in mid-October and versus the dollar, the
forint was quoted at 450. The MNB introduced an 18% deposit rate in
an emergency meeting in mid-October to contain the market turbulence
and the rate was left unchanged at the last rate-setting meeting on
December 20.

Unlike its peers in the region, such as the Czech National Bank, the
MNB does not have ample FX reserves to protect the forint, which has
been under pressure in 2022 from the deterioration of the current
account balance and news on the negotiations with the EU on releasing
Cohesion Funds and post-pandemic recovery funds. The agreement in
early December fuelled a forint rally, and the USD/HUF rate
strengthened to 380.

After the government phased out the fuel price cap in early December,
analysts raised their inflation expectations further in 2023 to 16-18%.
These projections fuelled fears of real interest rates falling deeper into
negative territory, further weakening the currency.

The failure to make a deal with the EU could push the forint even
beyond the previous low, analysts warned before the agreement on the
EU on frozen funds was reached. Taking short positions against the
forint has become much more costly with the effective base rate at
18%, the highest in the CEE region.

Hungary’s state debt manager was active in H2 on the FX bond
markets in H2, with new issues to make up for trickling EU funds and to
finance the trade gap. Hungary issued a €1bn green eurobond in
November, followed by a green panda bond issuance of RMB2bn
(€270mn). The transactions lifted the share of FX debt to over 25% of
the total.

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