Hungary may seek to join the euro’s ERM-2 waiting room this year or next, and the issue is on the government’s agenda, said Finance Minister Mihaly Varga at a background meeting with journalists on October 11, where he made it clear that the government is committed to meeting deficit targets for 2022 and 2023.
Varga’s comments were aimed at shoring up the exchange rate of the battered forint, which continued to hit new record lows. After the release of the September CPI data, which showed headline data and core inflation soar over 20%, the forint fell to a record low of 429.9 against the euro. The USD/HUF slipped to 443 on Wednesday morning, a historic low.
The Hungarian currency, the third-weakest emerging market currency after the Argentinian peso and Turkish lira, has plunged 5% since the end of September when the Hungarian National Bank wound up its rate-tightening cycle after raising the base rate by 125bp to 13%, the highest in Europe. The forint, which fell 15% against the euro and 36% versus the dollar since the beginning of the year, has been under pressure from the sharp deterioration of the country’s external balance due to the country’s strong dependence on Russian energy.
The country's economic convergence to the EU average has reached a level where it could enter the ERM-2, which is the precursor to joining the euro area, according to Varga.
Joining the ERM-2 may make Hungary more competitive, given its exposure to the euro area, he said, adding that the government was examining the conditions Croatia undertook to join ERM-2 before its planned euro adoption next year.
His comments could be viewed as the first sign of a possible U-turn by the Orban government on the issue, which has so far shown no willingness to take the technical steps needed to join the euro.
Central bank and government officials previously said that Hungary should join the eurozone if the country’s average per capita GDP level converges to that of the EU. Based on 2021 data, Hungary's GDP adjusted to purchasing power parity was 76% of the EU average. The government’s economic policy in the last 10 years was based on letting the forint weaken to help exports and mask the country's lack of competitiveness, according to economists.
Varga also spoke about the budgetary outlook for this year, saying the cabinet will stick to meeting the 6.1% deficit target for 2022, which was raised by 1.2pp due to a technical revision after stocking up gas storage buying additional gas.
Parliament will review the 2023 budget, approved in the summer, in December, he said The budget was approved with a 4.1% GDP growth and a 5.2% inflation target, which has since become outdated. The finance minister flagged recession for 2023 at a recent economic forum and the market is expecting inflation to remain in the 14-16% range next year. Varga made it clear that the 3.5% deficit target in 2023 will be met.
Soaring energy prices have lifted the country’s energy bill to $19bn this year, a 5-6-fold increase, which could be as much as $29bn, calculated on the highest oil and gas prices this year.
The government expects an agreement on EU funds to be reached this year, and plans to receive the entire funding from Cohesion Funds and the Recovery and Resilence Funds (RRF) in the first half of the year, he said.
Varga said Hungary’s deficit can be financed from domestic sources and there is no need to go to the FX market with a large issuance to raise funds or the IMF. The issue of smaller-sized euro- or green panda bonds could be on the horizon, he added.