Moody's changed the outlook of its Baa2 sovereign debt rating to Negative from Stable

HUNGARY - In Brief 01 Dec 2024 by Istvan Racz

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This happened on Friday, November 29, at Moody's last review date set for this year: This was no surprise at all. Hungary has had a split rating from the top three agencies for quite a while, and against the worse ratings granted by Fitch Ratings and mainly S&P, Moody's appeared to be quite generous. In addition, all three agencies have stated clearly that Hungary's failure to improve its access to EU funds would eventually lead to a negative rating action. And now that more than half of the currently blocked part of Hungary's 2021-2027 EU transfer quota is most likely to be lost in less than a month, the time has come for Moody's to act upon its promise. On top of this problem, Moody's mentioned Hungary's high dependence on the weak German economy and the risk around the continued access to Russian gas supplies. As for EU transfers, Moody's estimated that over the 2021-2027 period (in effect between 2024-2030, with a Y+3 lag as regards the actual distribution of funds), Hungary would be entitled, in principle, to 24% of its 7-year GDP in gross EU transfers, meaning 3.4% of GDP annually. At present, 10% of 7-year GDP is blocked by the EU, and some 60% of that latter amount, mainly RRF funds, will be definitively lost at end-2024, unless some miracle happens in terms of the government suddenly and unexpectedly meeting the EU's rule-of-law requirements until then, which is completely unlikely. So, the likely availability of EU funds will be limited to 2% of GDP annually, as for the currently unblocked part. Once again, these are all gross figures: the EU expects 0.8% of GDP in Hungary's annual contribution to the EU budget, and this requirement will not be lessened if Hu...