S&P downgraded Hungary to BBB-, with Stable outlook, on Friday

HUNGARY - In Brief 29 Jan 2023 by Istvan Racz

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S&P had been holding Hungary on BBB/Negative since August 2022. The explanation of its downgrade, announced on January 27, included: (1) sharp monetary tightening, forced by sustained high inflation, forint volatility and external pressure; (2) high energy prices, uncertain economic prospects and rising debt cost, putting fiscal policy under pressure; (3) missing access to EU funds, the potential positive solution affecting politically sensitive areas. S&P emphasised its Stable outlook attached to the new rating, which is meant to refer to Hungary's resilience to a major economic downturn and the risks generated by the Ukrainian war over the next two years, despite the inflexibilities of its fiscal and monetary policies. S&P did not like the fact that Hungary has been governed under various states of emergency since 2020, which limited the operation of democratic checks and balances. In their view, this leads to the risk of incalculability and instability of economic policy, which is bad for the investment environment and long-term growth prospects. An example for this problem is the recent proliferation of extraordinary sectoral taxes, they said. However, the agency also stressed that its forecast is based on the assumptions that Russian gas shipments will continue and there will not by any significant cutback to available EU funds, only a delay in their disbursement. A further downgrade could take place if gas supplies became uncertain or if Hungary's transfer quotas would be significantly reduced by the EU. An upgrade could take place if Hungary managed to reduce its fiscal and external deficits faster than expected. S&P has long been the toughest on Hungary out of ...