Fitch Affirms Hungary 'BBB' Rating, Negative Outlook

 "Hungary's ratings are supported by strong structural indicators relative to 'BBB' peers, investment-fuelled economic growth and solid net FDI inflows. These 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," Fitch said.

"The negative outlook reflects risks around the policy environment and the performance of public finances, which could undermine economic stability and pressure financing costs," it added.

Fitch expects the general government deficit to narrow to 4.9% of GDP in 2024 -- over the 4.5% government target -- and sees budget revenue supported by recovering private consumption and a strong labor market, as well as by windfall taxes and dividend payments from state-owned companies. The rating agency acknowledged a government decision to postpone state investments equivalent to 0.8% of GDP.

Fitch forecasts Hungary's state debt-to-GDP ratio will rise to 74.1% in 2024 from 73.5% in 2023, before falling to 73.3% at end-2025. 

Fitch noted that the European Commission had unlocked EUR 12.5 billion of Hungary's European Union funding following progress on judicial reforms, but around EUR 9.7 bln of the country's cohesion funds remained suspended.

Fitch expects Hungary's GDP growth to pick up to 2.3% in 2024, parallel with the recovery of private consumption and improving sentiment, then accelerate to 3.8% in 2025 as new production capacities in the automotive and battery industries become operational, boosting export performance.

Fitch said inflation would pick up, from 4% in May, in the coming months because of base effects, but put it back in the central bank's 3%+/-1 pp tolerance band in H2 2025. It put average annual inflation at 4.4% in 2024 and 3.9% in 2025.

Fitch pointed to a "significant improvement" in Hungary's external position, with the current account moving into surplus in 2023 following a deficit of 8.2% of GDP in 2022. Fitch sees the current account surplus widening to 1% in 2024 and 2% in 2025.

Hungarian banks are "robust" in spite of a windfall profit tax and statutory interest rate freezes on loans, Fitch said. NPL ratios in the sector stood at 3.8% for non-financial companies and 2.4% for households at the end of February, it added.

Greater confidence that the government will put the state debt ratio "on a firm downward trajectory" as well as an improvement in governance and economic policy could lead to a positive rating action, Fitch said. A "persistently looser" fiscal policy that keeps the state debt ratio from falling as well as failure to address risks around macroeconomic policy credibility could result in a negative rating action, it added.