This report does not constitute a rating action.
Key Takeaways
- External headwinds and policy trade-offs could complicate Hungary's fiscal consolidation.
- Germany's weak economy, uncertainty about the evolution of EU funding, additional fiscal pledges ahead of national elections, and a further depreciation of the forint are among the key risks.
- We expect Hungary's general government debt to GDP will peak in 2026, followed by a modest decline thereafter.
Hungary's (BBB-/Stable/A-3) fiscal consolidation agenda could face challenges amid external headwinds and complex policy trade-offs. The country posted general government deficits of 4.9% of GDP in 2024 and 6.7% in 2023. Considering the weak growth outlook for Hungary's trade-intensive economy, authorities could struggle to achieve their objective of reducing budgetary deficits to below 3% of GDP by 2026 (see chart 1).
The government's fiscal plan is based on the assumption that real GDP growth will accelerate to 3.4% in 2025 and 4.1% in 2026, up from below 1% in 2024. S&P Global Ratings' GDP growth projections are 2.7% for this year and 2.8% for 2026.
Chart 1
Key Risks
The uncertain external environment could weigh on Hungary's growth. Rising trade tensions between the EU and the U.S. could weaken the already fragile growth outlook in Germany, Hungary's largest trading partner. Germany accounts for about 25% of Hungary's goods exports, of which about two-thirds relate to machinery and transport equipment.
This means a shift in demand from Germany, particularly from the automotive industry, would affect Hungary's economy (see chart 2). We have recently revised downward our forecast for Germany's annual growth to 0.5% in 2025--compared with our expectation of 1.2% in September 2024--and 1.0% in 2026, versus our forecast of 1.3% in September 2024.
Chart 2
The implementation of the government's Economic Policy Action Plan could result in additional tax and spending proposals. Considering external headwinds, the government could focus on boosting domestic demand to reach its near-term growth targets. This could increase the risk of overspending. We believe the government could stimulate the economy over the medium term, for example via state-owned enterprises, which have previously been involved in the execution of various government policy programs.
In line with its Economic Policy Action Plan, the government aims to increase real GDP growth to 3%-6% over the medium term by mobilizing about Hungarian forint (HUF) 4,000 billion (€9.8 billion or about 5% of estimated GDP in 2024) in 2025, including more than HUF2,600 billion (3.2% of GDP) on households and HUF1,400 billion (1.7% of GDP) on businesses.
Changes in the forint exchange rate will affect fiscal developments. Hungary's outstanding foreign exchange-denominated debt accounts for about 30% of total debt. We estimate that the depreciation of the forint in 2024--with a HUF/EUR exchange rate of 411 at the end of the year (down 7.3% over the full year)--increased general government debt by about 1.4 percentage points of GDP. Even though the economy has been running a current account surplus, the forint exchange rate has been sensitive to the market's perception of Hungary's macroeconomic policy outlook, its relations with the EU, and regional geopolitical developments.
The outlook for EU funding is also relevant to our growth and exchange rate projections. Even though Hungary has access to cohesion funds of €12.2 billion (about 6% of GDP) under the 2021–2027 appropriation cycle, we estimate that its absorption of EU funds was lackluster in 2024. We note that cohesion fund disbursements were curtailed over the second half of 2024 because payments were netted off the fines that the EU imposed on Hungary after a ruling by the European Court of Justice on June 13, 2024. The ruling focused on Hungary's non-compliance with EU asylum policies and resulted in a €200 million fine, with an additional daily penalty of €1 million until compliance is achieved.
We recognize that Hungary has received about 8.5% (€2.0 billion) of its total allocated cohesion policy funds as of December 2024, ranking it 11th among the EU27 group in terms of absorption. We estimate that Hungary received, or has access to, about 45% of its recovery and resilience facility (RRF) and cohesion policy financing envelopes, while the remainder continues to be blocked (see chart 3).
On Dec. 31, 2024, the total cohesion fund allocation to Hungary permanently reduced by €1.04 billion, following the expiration of deadlines to satisfy EU disbursement requirements. We note that deadlines for unblocking and absorbing EU funding, including RRF allocations, could become pertinent over the next two years.
At present, we expect neither Hungary nor the EU are likely to change their political stance, which, in our view, makes any breakthrough in EU funding disbursement unlikely. This increases the risk of the capital account balance falling short of our current forecast of, on average, 1.5% of GDP over 2025-2026. Additionally, it could impair the foreign exchange rate and broader economic growth.
Chart 3
The parliamentary elections in 2026 could lead to new tax and spending pledges. Additionally, weaker fiscal outcomes would likely complicate the Hungarian central bank's capacity to meet its inflation targets, which would affect fiscal and monetary policies alike. We note that the yields of Hungarian government bonds and the forint foreign exchange rate have been sensitive to Hungary's economic policy developments. This suggests the market's reaction to government overreach could complicate consolidation efforts further.
What's Next
In our base-case scenario, we expect general government debt to GDP will peak in 2026, followed by a modest decline due to fiscal consolidation measures. Considering that inflation has decreased, the repricing of the government's inflation-linked retail bonds could support the decline in government deficits and reduce the interest bill to close to 4% of GDP this year, compared with almost 5% of GDP--or above 11% of revenues--in 2024. Yet this fiscal path could require policy trade-offs due to the risks mentioned above.
Related Research
- Sovereign Risk Indicators, Dec. 9, 2024
- Hungary 'BBB-/A-3' Ratings Affirmed; Outlook Stable, Oct. 25, 2024
- CEE Sovereign Outlook 2024: Five Risks To Watch, Dec. 14, 2023
| Primary Credit Analyst: | Gabriel Forss, Stockholm + 46 84 40 5933; gabriel.forss@spglobal.com |
| Secondary Contact: | Karen Vartapetov, PhD, Frankfurt + 49 693 399 9225; karen.vartapetov@spglobal.com |
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