"Hungary's ratings are supported by strong structural indicators relative to 'BBB' peers, investment-fuelled economic growth and solid net FDI inflows," Fitch said.
"These are balanced against high public debt relative to peers, a record of unorthodox fiscal and monetary policy moves, and a worsening of governance indicators in recent years to closer to the 'BBB' median," it added.
The negative outlook reflects "risks around policy environment and potential spillovers to the economy", Fitch said, pointing to sectoral windfall taxes and interest rate subsidies that "hamper monetary policy transmission". The rating agency also acknowledged a favorable financing environment, the return of macroeconomic stability and a "smooth" monetary easing.
Fitch puts Hungary's general government deficit for 2023 at 5.6% of GDP, over the government's modified 5.2pc target, as revenue from taxes on consumption fall and inflation-related spending boosts expenditures, but it sees state debt, relative to GDP, declining.
The agency forecasts a 0.6% contraction of the economy in 2023, but augurs GDP growth of 3% in 2024, driven by household consumption.
Fitch sees average annual inflation falling to 5% in 2024, before dropping into the National Bank of Hungary's 3% +/-1pp target range in 2025.
Fitch forecasts the current account surplus will narrow from 1.3% of GDP in 2023 to 0.3% in 2024 as rising household consumption feeds into imports.
Hungary's banking sector is "performing well" in spite of a windfall profit tax and interest rate freezes, Fitch said. Lenders' profitability is expected to moderate in 2024 but remain "relatively strong", it added.
Failure to address risks around "macroeconomic policy credibility and governance" or a "persistently looser" fiscal stance that causes the state debt ratio to rise could lead to a negative rating action, while an "improvement in governance and economic policy" could lift the rating, Fitch said.
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