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Investing.com -- S&P Global Ratings has revised its outlook on Hungary to negative from stable on April 11, 2025. The ratings agency has affirmed its ’BBB-/A-3’ long- and short-term foreign and local currency sovereign credit ratings on Hungary. The negative outlook reflects increasing risks to Hungary’s fiscal and external stability over the next two years due to rising trade protectionism, weakening global demand, narrowing capital inflows, and increased interest spending amid pre-election budgetary loosening.
The ratings could be lowered if Hungary’s fiscal performance is weaker than forecasted or if external pressures compound, for example, via spillover effects from trade war escalations, cancellation of major EU funding allocations, or misaligned monetary policy settings. This could affect the forint’s exchange rate and inflation.
On the other hand, the outlook could be revised to stable if fiscal consolidation occurs more rapidly than projected, shifting debt to GDP onto a clear downward path. The outlook could also be revised to stable if Hungary makes tangible progress in accessing more of its EU funding allocations, including its Recovery and Resilience Facility (RRF) grants, over the coming two years, benefiting government finances and investments.
The revision of the outlook to negative reflects risks to Hungary’s public finances from the uncertain growth outlook, high interest expenditure, narrowing EU fund inflows, and spending pressures ahead of a tightly contested election. The country’s high debt to GDP and persistent inflationary pressures imply limited policy flexibility for Hungarian authorities.
Amid global trade disruptions, vulnerabilities are rising due to the Hungarian economy’s openness, with exports equivalent to 75% of GDP, a significant share of which are vehicles or auto components. The outlook for domestic demand is also subdued, given elevated interest rates, and weak business and household confidence. Compared with the most recent publication on the country from Oct. 25, 2024, the forecast for Hungary’s 2025 GDP growth has been lowered to 1.5% from 3%, well below the government’s medium-term target of 3%-6%.
Despite the consolidation of government finances in 2024, Hungary’s debt to GDP is the highest in the region, at 73.5%. This is combined with an interest bill that is forecasted at over 4% of GDP for 2025, among the highest in the EU. The general government balance is forecasted at 4.5% of GDP for 2025 and 4.0% in 2026, compared with the government’s targets of 3.7% and 3.5%, respectively. Discretionary spending hikes ahead of the 2026 elections present a risk to these fiscal projections.
Additional pressures could come from inflation and the exchange rate. Resurging domestic inflation amid softening growth will also complicate the Hungarian National Bank’s (MNB’s) policy execution. Hungarian inflation was 4.7% in March, down in part from the government’s anti-inflationary measures, but still up from 2024’s average of 3.7%. The impact from the government’s measures to tame inflation is expected to be only temporary and now see inflation averaging 4.5% for 2025, up from the 3.6% forecast in October 2024. With a policy rate of 6.5% since September 2024, Hungary has yet to recover material policy space compared with its end-2021 2.4% policy rate.
The likelihood of Hungary drawing any RRF funds before the funds’ expiry in December 2026 is considered unlikely. EU fund absorption disappointed in 2024. In the year, Hungary’s budget received about Hungarian forint (HUF) 1.3 trillion (€3.2 billion) of European Cohesion funds, about half of the planned amount and prompting delays to the government’s investment program. Little progress is seen in unlocking further EU funding, most notably Hungary’s RRF allocations. These funds total €9.5 billion in grants and loans (about 4% of GDP) and its access remains contingent on the completion of reforms. Neither Hungary nor the EU are likely to compromise on their political positions, which, in view, makes any breakthrough in disbursement unlikely, in particular before the 2026 elections. The capital account balance forecast over 2025-2028 has been lowered, to 0.9% of GDP on average, compared with the previous expectation of 1.5%, reflecting the assessment that RRF inflows will be absent.
As the 2026 election approaches, there are risks of difficult policy trade-offs. The 2022 general elections gave way to a constitutional super majority for Prime Minister Viktor Orban’s Fidesz party, albeit at a cost to fiscal prudence. With policymakers now entering election mode, weaker fiscal outcomes would likely complicate the central bank’s capacity to meet its inflation targets, worsening the coordination between fiscal and monetary policy. In addition, the government’s frequent use of state-of-emergency measures--which have been extended on different grounds since 2020--reinforces the view that checks and balances between public institutions remain limited.
The inflow of foreign direct investment (FDI) fell to 2.0% of GDP in 2024, compared with 8.4% in 2022. The high levels of inward FDI recorded in 2021-2022 reflected sizable investments in Hungary’s electric vehicle (EV) sector and associated battery production facilities, notably from Chinese companies. Prospects for further investments in these sectors is vulnerable to lower demand for EVs across Europe and evolving global trade tensions. At the same time, the EU’s decision to impose tariffs on Chinese EV imports could accelerate direct investment into European auto manufacturing hubs, including Hungary.
Hungary’s growth outlook remains uncertain considering that the country’s open and trade-intensive economy is susceptible to external developments. These include growth in Germany, Hungary’s key trading partner; the scope, extent, and longevity to which global trade tariffs are introduced; and the effect of geopolitical tensions on energy or other key import prices. U.S. tariffs pose risks to global economic growth, although Hungarian growth should be less subject to direct effects. This is because only about 4% of goods exports are sold to the U.S., which reduces the vulnerability of Hungary’s exports. But the country could suffer ripple effects from lower economic growth in the eurozone, its main trading partner.
Hungary’s general government deficit improved to 4.9% in 2024 from 6.7% in 2023, supported by government consolidation measures and strengthening tax receipts. The government’s efforts shifted the general government’s primary balance to a surplus of 0.1% of GDP, compared with a deficit of 2% of GDP in 2023. The government’s active consolidation measures in 2024 totaled about 1.3% of GDP and included cuts to capital expenditure and the amendment of sector-specific taxes in energy and banking. Despite these efforts, the general government deficit in 2024 was higher than the government’s revised full-year forecast of 4.5% of GDP, from higher interest expenditure, public wages, and social contributions.
The elections in 2026 could lead to further tax and spending pledges. The government has already rolled out measures that expand family housing subsidies, award personal income tax breaks to mothers, and contributions to start affordable housing projects; these are accounted for in the fiscal forecast. Hungary’s fiscal deficit is forecasted at 4.5% of GDP in 2025, compared with the government’s budgeted deficit of 3.7% of GDP, including the measures introduced and the economic growth forecast. The country’s public finances, even outside of election periods, have recently been characterized by spending overruns.
Risk from inflation continues. After peaking at 25.7% in January 2023, inflation decreased consistently over 2024, reaching a 3.7% average for the year. The trend has shifted since November 2024, with inflation coming in at 4.7% in March 2025 from repricing of food and services. Government measures, including restrictions on profit margins for food products and caps to fees charged by banks, have been introduced and helped contain inflation from the 5.6% of February. That said, the impact from the caps will likely be only temporary.
In 2024, Hungarian banks achieved a solid systemwide return on equity of 17.9%, owing to strong net interest income and robust asset quality. Despite the economic cooling in 2024, there was no material worsening in credit quality as household creditworthiness remains resilient and asset quality stabilization was supported by the reclassification of transactions previously under the payment moratorium. Moreover, liquidity reserves are ample, supported by the rise in household savings and rising central bank reserves.
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