Rating Action Commentary
ֳ Revises Hungary's Outlook to Stable; Affirms at 'BBB'
Fri 06 Dec, 2024 - 5:03 PM ET
Related Content:
Hungary - Rating Action Report
ֳ - Frankfurt am Main - 06 Dec 2024: ֳ Ratings has revised the Outlook on Hungary's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BBB'.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
The revision of the Outlook on Hungary's IDRs reflects the following key rating drivers and their relative weights:
Medium
Easing of Policy Uncertainty: Improved coherence between fiscal and monetary policies have contributed to a significant reduction in macroeconomic imbalances including a sharp decline of inflation and the return to a current account surplus (CAS). The National Bank of Hungary (MNB) has maintained a tight monetary policy stance, while the government has taken steps to reduce the primary deficit since 2023.
Uncertainty remains about the government's policy mix in the run-up to the Spring 2026 general election, but ֳ's cautious macroeconomic and fiscal projections assume a balancing of policy priorities against reducing risks in terms of financial market volatility. Our forecast also incorporates our view that political considerations will continue to limit Hungary's full access to EU funds, including due to limited progress on required Recovery and Resilience Facility reforms in 2025.
Prudent Monetary Easing: The MNB has phased out unconventional policies and maintained relatively tight monetary conditions since 2022. It has cut the key rate by a cumulative 650bp to 6.5% by October 2024, while the pace of rate cuts slowed in 2H24 due to deteriorating market sentiment. ֳ expects the MNB, under the recently nominated Finance Minister Varga, to resume prudent monetary easing after 1Q25, given domestic price dynamics and elevated external uncertainty, with a key rate forecast at 5.25% at end-2025.
Moderation of Inflation: HICP inflation fell to 3.4% in October 2024, from a peak at 26.2% in January 2023, as the impact of the energy and food price shocks abated, and monetary policy remained restrictive. Tight labour market and backward-looking repricing of certain services kept core and services inflation above the headline figure. Implemented tax changes and expected currency pressure might push inflation somewhat up in 2025. ֳ forecasts average inflation to be 3.7% in 2024 and decline to 3.4% in 2026, still slightly above the projected peer median of around 3%.
Balanced Primary Fiscal Position: ֳ projects a significant improvement in the fiscal primary balance, from a deficit of 2% of GDP in 2023 to a surplus of 0.2% in 2024, will be maintained over the forecast horizon. Under this scenario, the fiscal deficit will narrow to 4.8% in 2024 (versus the government's 4.5% target), from 6.7% in 2023. The expected decline in interest expenditure will support a further decline in the fiscal deficit to 4.2% in 2025 and 3.7% in 2026. The somewhat higher deficit relative to the government's forecasts reflects our expectation of relatively weaker economic growth and some increase in spending ahead of the parliament election in Spring 2026.
Projected Gradual Fall in Debt: ֳ has greater confidence that debt/GDP will be on a modest downward path - from a projected 74.9% in 2024 - driven by a return to a balanced primary position and solid nominal GDP growth. At 72.2% at end-2026, debt/GDP will be above the pre-pandemic level and compares with a forecast 'BBB' median of 59.1%, but we expect it to maintain a gradual decline over the medium term. We expect interest/revenue to peak at 11.7% in 2024 and to decline to a below-peer-median 8.4% in 2026, in line with the repricing of retail securities and monetary easing.
Current Account Improvement: ֳ forecasts the CAS to widen to 2.2% of GDP in 2024, from 0.8% in 2023 and a deficit of 8.3% in 2022, on improving goods balance. New production facilities will boost export capacity from 2H25 but will be partially offset by increased import activity, which reflects a strong inflow of import-intensive FDIs and expected economic recovery. We expect the CAS to average 2% in 2025-2026. We see capital surplus moderating in 2024-2026, in line with expected EU funds inflows, while net FDIs should remain solid, reflecting new commitments in auto and battery industries.
Hungary's 'BBB' IDRs also reflect the following key rating drivers:
Credit Fundamentals: Hungary's ratings are supported by strong structural indicators relative to 'BBB' peers. Hungary is a competitive destination for FDI, notably in automotive and battery sectors, and investment fuelled growth in recent years. These strengths are balanced against high public debt relative to peers, a record of unorthodox policy moves, and a worsening of governance indicators in recent years to closer to the 'BBB' median.
Gradual Growth Recovery: The Hungarian economy continued to underperform in 2024 as investment decline deepened and private consumption only began to recover gradually. ֳ expects real GDP growth to be just 0.4% in 2024 before improving to 2.5% in 2025. We expect private consumption to accelerate next year given the high level of savings and solid real wage growth. Investment activity should benefit from stronger external demand, which improves prospects for export-oriented manufacturing.
The new production capacities should become operational in 2H25, boosting Hungarian export performance. We see GDP growth accelerating to 3.5% in 2026 on the back of improved investment and export. High exposure to trade with Germany and automotive sector leaves Hungary more vulnerable to a potential prolonged stagnation of the German economy and possible higher US import tariffs.
Stable Banking Sector Despite Interventions: The Hungarian banking system remains stable, underpinned by a high average capital ratio (total capital ratio at 20.6% at end-3Q24) and liquidity buffers. Despite extraordinary government policy measures and interest rate cuts, the sector's profitability in 9M24 remained strong. Asset quality proved more resilient to weak economic activity, with the non-performing loans ratio improving to 2.4% at end-3Q24. The increase in existing taxes and introduction of a new levy will result in additional costs for banks, but these appear financially manageable.
2026 Elections: Since the TISZA party, led by Peter Magyar, finished second in the 2024 European Parliament elections with nearly 30% support, it has continued to gain popularity. The challenge for the opposition is to translate current positive momentum into a robust organisational structure and coherent policy proposals ahead of the Spring 2026 parliamentary elections.
ESG - Governance: Hungary has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Hungary has a medium WBGI ranking at 63rd percentile reflecting solid institutions, backed by EU membership, balanced with concerns over the weakening of the rule of law and a moderate level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Macro: Deterioration in the policy mix that leads to the build-up of macroeconomic imbalances and/or undermines investor confidence.
-Public Finances: A persistently looser fiscal stance that places the government debt/GDP on an upward trajectory.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Public Finances: A sustained decline in general government debt/ GDP levels closer to the peer medians.
- Macro/Structural: Stable and sustainable medium-term growth aided by an improved institutional environment and predictable policymaking, without the emergence of macroeconomic imbalances such as a large current account deficit or prolonged, high inflation.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns Hungary a score equivalent to a rating of 'BBB' on the Long-Term Foreign-Currency (LT FC) IDR scale.
ֳ's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
ֳ's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ֳ's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Country Ceiling
The Country Ceiling for Hungary is 'A', three notches above the Long-Term Foreign-Currency IDR. This reflects very strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
ֳ's Country Ceiling Model produced a starting point uplift of +3 notches above the IDR. ֳ's rating committee did not apply a qualitative adjustment to the model result.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Hungary has an ESG Relevance Score of '5[+]' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Hungary has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
Hungary has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Hungary has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.
Hungary has an ESG Relevance Score of '4[+]' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Hungary has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
Hungary has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Hungary, as for all sovereigns. As Hungary has track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v2.0.2 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.14.2 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Hungary | EU Issued, UK Endorsed |