(Bloomberg) -- Hungary’s forint came under pressure as the country’s economic performance worsened and further complicated the increasingly urgent task of fixing its budget.
The currency weakened as much as 0.5% to the euro on Friday, marking its biggest weekly decline in a month and trailing peers in eastern Europe. The forint has underperformed in much of 2024 amid recurring tension over economic stimulus and monetary policy.
Adding to negative signs for the economy, data showed on Friday that industrial production shrank more than expected in July as the vehicle sector championed by the government underperformed once again. That compounded negative signals from other indicators, including investment and retail sales, in the past few days.
The forint started weakening late on Thursday, after Bloomberg reported that Prime Minister Viktor Orban was set to rip up his budget-consolidation promises to unleash more spending before elections in 2026. The currency extended losses after Friday’s economic data.
Hungary’s dilemma is that growth weakness is also feeding in from abroad via exports, according to Malin Rosengren, a London-based portfolio manager at RBC Bluebay. While additional fiscal stimulus will help support domestic consumption, it will put pressure on external balances and thus represent a “double whammy” on the forint as markets will move to price a higher risk premium, she said.
Finance Minister Mihaly Varga acknowledged on Friday the difficulties of stimulating growth and consolidating the budget at the same time.
Varga said the government won’t embark on a wave of spending but will focus on “targeted and limited” economic incentives, the Portfolio news website reported. In a separate statement, the Finance Ministry said Hungary would stick to a path of deficit cuts and debt reduction and would take additional steps if needed to meet those goals.
At the same time, Varga also acknowledged that the industrial and agricultural sectors were in decline, partly offset by services. Wage hikes and restarting state investment — delayed by this year’s spending cuts — are expected to “slightly” worsen the primary budget balance, which excludes interest payments, according to the minister.
Underscoring the complicated economic picture, central bank Governor Gyorgy Matolcsy, himself a former Orban ally, decried the government’s budget policy at the same conference on Thursday.
He accused the cabinet of being stuck in a cycle of fiscal revisions and of aggravating inflation. Balazs Orban, a close associate of the premier, though no relation, dismissed Matolcsy’s remarks as being driven by “personal” grievances.
It would be up to the central bank to manage the potential impact on the currency or inflationary pressures — or both — from increased budget spending, and the premier may lay the blame on Matolcsy whose term ends in March 2025, said Rosengren at RBC Bluebay.
“I see this as an opportunity to maneuver fiscal handouts without risking political backlash from the consequences,” she said. “It ultimately plays to his hand and allows him to once again emerge as the victor Hungary needs.”
--With assistance from Peter Laca and Zoltan Simon.
(Updates with fresh market data in the second paragraph, new comments starting in fifth.)
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