S&P said Hungary's economic recovery would "gain traction in mid-2021" with the only major risks to the forecast related to delay in vaccination rollout and availability of EU funds over the medium term.

It added that government stimulus and EU monies would aid the economic recovery without incurring external imbalances.

S&P said the outlook reflects its expectation that government efforts to consolidate public balances "will be protracted" even after the pandemic, adding that it anticipates state debt levels relative to GDP will stabilize "at about 80%". The outlook also factors in expected "resilient" growth and high inflow of EU funds, the review noted.

The ratings agency noted Hungary's sovereign rating continues to be constrained by "weak checks and balances between government branches and moderate wealth levels".

S&P expects Hungary's economy to rebound, after an estimated 6.3% contraction in 2020, to 4.6% GDP growth in 2021. It said that private consumption would "likely surge" after pandemic restrictions are eased, given Hungarian households' high savings rate. Growth will also be supported by continuing government stimulus and EU funding, as well as a recovery in the economies of Hungary's trading partners.

The ratings firm said Hungary's long-term growth performance would remain constrained by public sector predominance in a number of economic areas, low productivity, especially among SMEs, poor demographics and a chronic skills shortage. 

It also noted that Hungary's state debt levels are among the highest in the region, but said it sees "no immediate funding pressure" considering the "broad array of tested domestic and foreign financing option" at the government's disposal.

The review argued that a faster-than-expected consolidation of government finances could result in an upgrade of Hungary's sovereign rating. It added that the upside scenario would "likely coincide" with strong absorption of EU funds and high economic growth. A deeper, more protracted fiscal deterioration, a delay in the availability of EU funds or any marked divergence from the National Bank of Hungary's free-floating exchange rate policy could result in a downgrade, it added.

S&P said it believes Hungary's relations with the EU "could deteriorate again, particularly ahead of the next general election in 2022".