The 2% of GDP slippage in the budget will be addressed in September

The Hungarian budget posted a deficit of HUF 44.3bn in July, bringing the year-to-date cash flow deficit to 86% of the full-year target. The decline in domestic demand is weighing heavily on tax revenues. In this respect, VAT receipts in the first seven months of 2023 were only 1.5% higher than a year ago, compared to an average inflation of 23.2% in this period.

We see a 2% of GDP slippage in this year's budget, which is likely to be addressed by a combination of consolidation and an upward revision of the target after the expected September revision. We see the EDP deficit target being raised by 0.5ppt to 4.4%, while a number of austerity measures are likely to be announced. From a financing perspective, the financing needs

Budget performance (year-to-date, HUFbn)

We believe the forint will benefit from the retuned hawkish message

Since the beginning of August, the Hungarian forint has strengthened versus the euro from levels above 390 to below 380. This has happened despite the fact that the "higher for longer" narrative has gained momentum in the US, which has kept the dollar firmly bid. Not to mention the uncertainty surrounding the Australian LNG strikes, which caused volatility in gas prices. However, the forint seemed to shrug off these headwinds and closed the month with a gain of around 2.5% against the euro.

Going forward, we remain constructive on the overall outlook for the HUF. As the central bank has reined in excessive rate cut expectations, the relative carry opportunity has definitely improved. In this respect, the forint can maintain its very attractive carry, the highest in the Central and Eastern European region and leads the emerging markets space despite 400bp of cuts so far.

The NBH will carry out the second phase of monetary policy normalisation in such a way that HUF assets will be supported by the highest real interest rates in CEE. In addition, the country's external balances have improved significantly due to the slump in domestic demand, and we now expect the current account to post a full-year surplus. Taking these factors into account, we still believe that the forint can strengthen back to the 370 level against the euro by the end of this year. But the road there will be bumpy, with many red flags waving, from the fate of EU funds to the outcome of this year's budget review to the decisions of credit rating agencies.

CEE FX performance vs EUR (30 December 2022 = 100%)