Standard & Poor’s has revised Hungary’s sovereign credit outlook from stable to negative, warning that increasing fiscal slippage and persistent inflation could threaten macroeconomic stability ahead of the country’s 2026 parliamentary elections. In the first sovereign rating action on Hungary in 2025, the rating agency affirmed the country’s long- and short-term foreign and local currency ratings at 'BBB-/A-3', the lowest rung of investment grade, but flagged elevated debt and interest burdens as key vulnerabilities.

The outlook downgrade, announced after the close of the markets on April 11, reflects S&P’s concern that the Hungarian government may pursue further discretionary spending increases over the next two years, despite already high public debt and fiscal pressures.

"Hungary’s public finances remain under strain from high interest expenditures, while the economy faces the twin risks of persistent inflation and stagnant growth," S&P noted. "These trends, combined with global trade uncertainty and delayed EU funding, increase the risk of policy missteps."

 Despite the affirmation of the rating, the shift in outlook signals a heightened likelihood of a future downgrade if budgetary or external imbalances worsen.

S&P now expects Hungary’s general government deficit to reach 4.5% of GDP this year – significantly above the government’s 3.7% target, while public debt is set to remain one of the highest in the region, at 73.5% of GDP. Interest expenditures alone could exceed 4% of GDP in 2025, placing Hungary among the EU’s most exposed countries to rising debt-servicing costs, which accounted for 11.9% of government revenues last year.

The 2025 GDP forecast was also slashed to 1.5% from 3%, citing weakening domestic demand, high borrowing costs and low investor confidence. This falls below the government’s revised 2.5% growth target from the 3.4% target in the budget.

Hungary’s inflation rate, though easing, remains sticky, with S&P expecting a 2025 average of 4.5%, up from a previous 3.6% forecast. While headline inflation fell to 4.7% in March from 5.6% in February, the agency expressed scepticism over the durability of price controls and anti-inflation measures.

"We believe the government’s anti-inflation toolkit may only have a temporary effect," analysts said.

S&P analysts are also concerned that the expected loosening of fiscal policy could complicate the work of the central bank and the resurgence of inflation, amid weakening economic growth, also makes it more difficult for the MNB to achieve its economic policy objectives.

S&P expects the MNB to tread cautiously in 2025, adopting a more conservative and orthodox policy stance. Under its baseline scenario, S&P anticipates a pause in monetary easing throughout the year, as inflation remains stuck above target.

While the recent change in the central bank’s leadership could herald a somewhat more growth-oriented stance, the rating agency does not expect the MNB to "turn significantly more dovish in 2025-26."

The MNB is expected to maintain its benchmark interest rate close to the current 6.5% level through the year as inflation volatility and a weakening forint, trading close to 410 to the euro, limit the scope for monetary easing, according to analysts.

Hungary’s access to EU funds also remains in question. Analysts expressed skepticism that Budapest will be able to draw down Recovery and Resilience Facility (RRF) resources before the end-2026 deadline, pointing to underwhelming absorption in 2024.

S&P also flagged Hungary’s high external vulnerability, given its export-driven economy and dependence on automotive manufacturing, which remains sensitive to global supply chain disruptions and geopolitical frictions. About 75% of Hungarian GDP is tied to exports, making the country particularly susceptible to shifts in global demand and EU trade policy.

The decision to revise Hungary’s outlook comes amid broader concerns over deteriorating coordination between fiscal and monetary policy, as well as increased pre-election populism. Analysts noted that pro-growth spending ahead of the 2026 elections, if not offset elsewhere, could erode fiscal credibility and limit room for counter-cyclical stimulus in the event of a global slowdown.

S&P outlined several scenarios that could trigger a future downgrade, including weaker-than-expected fiscal performance, a further deterioration in Hungary’s external position, or heightened financial market instability – particularly if EU funds remain suspended or the forint comes under renewed pressure.

Conversely, the agency would consider revising the outlook back to stable if the government achieves faster-than-expected fiscal consolidation and demonstrates a credible path to reducing the debt-to-GDP ratio. A breakthrough in EU funding negotiations could also materially improve Hungary’s risk profile, S&P said.

Hungary’s National Economy Ministry (NGM) downplayed the significance of the outlook change, stressing that the country remains firmly within investment-grade territory. It characterised the revision as “temporary,” suggesting that positive fiscal and economic developments in the second half of the year could prompt a return to a stable outlook.

The government aims to put the country on a path of sustainable and balanced economic growth, the ministry said. It put GDP growth over 3% in H2 and full-year growth at 2.5%, while growth in 2026 is expected to be around 4%.

Of the other rating agencies, Moody’s maintains Hungary at 'Baa2', two steps above junk, but with a negative outlook, while Fitch holds Hungary at 'BBB', one notch higher than S&P, but retains a stable outlook. The two rating agencies will issue their scheduled review on May 30 and June 6 respectively.