Rating action

Scope Ratings GmbH (Scope) has today affirmed Hungary’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at BBB. Scope has furthermore affirmed the short-term issuer ratings at S-2 in local and foreign currency. All Outlooks remain Stable.

Hungary's credit ratings are underpinned by the following credit strengths: i) a strong track record of robust growth and solid medium-term growth prospects, bolstered by substantial foreign investments and significant EU funding, which enhance Hungary's export capacities and competitiveness; and ii) a robust structure of its external and public liabilities, along with an improved external position, which supports the country’s resilience to external shocks. Hungary's credit ratings face constraints due to: i) elevated public debt with a heightened interest-payment burden; ii) a sustained fiscal deficit reflecting limited fiscal flexibility; iii) weak governance indicators and lingering uncertainty regarding the inflow of substantial EU funds; and iv) heightened vulnerability to external shocks.

For the updated report accompanying this review, click here.

Key rating drivers

Strong track record of robust growth with solid medium-term growth prospects, bolstered by substantial investments. Hungary’s ratings are anchored by a history of robust economic growth, largely supported by foreign direct investment and EU funding. Prior to the pandemic, Hungary achieved an average annual GDP growth of 4.2% from 2015 to 2019 according to Eurostat, driven by strong investment levels. However, as an open, trade-dependent economy, the country's reliance on energy-intensive industries with international supply chains heightens its exposure to external risks. These risks are increasingly apparent as economic activity decelerates among Hungary's primary trading partners, including Germany. However, Scope expects that substantial capacity-expanding foreign investment projects will provide a stabilising effect, supporting sustained growth despite these vulnerabilities.

In recent months, domestic inflation has decelerated markedly, with headline inflation dropping to 3.0% year-on-year as of September 2024 - sharp contrast to its peak of 25.7% in January 2023. This rapid decline has provided the Magyar Nemzeti Bank (MNB) with room to initiate interest rate cuts, reducing the rate to 6.5% in September. This measured approach to monetary easing reflects the central bank's cautious stance, balancing inflation control with the ongoing risk of currency volatility, which remains a pivotal factor in its policy considerations.

Following a 0.9% contraction last year, Hungary’s GDP is set to grow modestly by 0.7% in 2024, close to the government’s target which was recently revised from 1.5% to 0.8%¹, hindered by weak demand from key trading partners and constrained investment under high interest rates. Q3 2024 GDP declined by 0.7% quarter-on-quarter, driven by slowdowns in agriculture, industry, and construction. Scope projects that growth will reach 2.8% in 2025, positioning Hungary among the fastest-growing economies within the EU. This robust growth outlook is driven by an expected recovery in external demand, increased investments in strategic sectors such as electric vehicles, and rising consumer confidence fueled by pent-up savings. Additionally, higher consumer demand is being bolstered by gains in the retail bond sector, with around one million Hungarian households holding exposure to sovereign debt through retail bonds. Around two-thirds of these bonds are inflation-linked, offering substantial returns and thereby enhancing disposable income for private households.

Hungary's long-term growth trajectory is supported by substantial foreign investment inflows reaching an all-time high of over EUR 13bn in 2023², with investments concentrated in the automotive sector. While German car manufacturers remain key players, recent diversification with global producers is broadening Hungary’s position within the global automotive supply chain. The country is also emerging as a significant hub for electric vehicle production, driven by large-scale investments in battery manufacturing. This sector, representing around 25% of Hungary’s manufacturing output as of 2023, is expected to expand significantly. The government projects that by 2030, battery production, along with advancements in battery recycling and electrical equipment R&D, could constitute up to one-third of domestic industrial output. However, this growth faces long-term demographic challenges, as the aging population and shrinking working-age group could constrain labour supply and the country’s growth potential.

Additionally, the government’s economic action plan aims to support medium term growth prospects, with focus areas including SME support and affordable housing. Key measures include doubling the child tax allowance and introducing a new 5% voluntary interest rate cap on housing loans. While these measures could bolster the country’s growth potential, estimated at around 2.5-3.0%, they may add inflationary pressures, complicating the government’s consolidation efforts.

A robust structure of external and public liabilities and an improved external position, enhancing the country's resilience to external shocks. Hungary’s external balance showed a substantial improvement in 2023, with the current account moving from a deficit of 8.5% of GDP in 2022 to a modest surplus of 0.8% in 2023 according to Eurostat. This shift was driven by lower energy prices and reduced private domestic demand, which strengthened the trade balance and reduced the external debt ratio to 86.0% in 2023 from 92.1% in 2022³. Additionally, EUR 12.2bn from Hungary’s Cohesion Fund allocation became available in December 2023 and March 2024 following judicial reforms, contributing to capital account flows.

Reserve coverage also improved, with reserves amounting to USD 41.8bn in August 2024, covering 86.0% of short-term external debt plus long-term debt maturing within one year—up from 67.7% in August 2023, supported by incoming EU flows. Although this remains below the 100% threshold deemed adequate by the IMF, coverage of short-term external debt alone reached around 150% in Q1 2024, underscoring Hungary’s solid reserve adequacy and providing a robust buffer for external financial obligations. For 2024, a current account surplus of 0.8% of GDP is expected, with gradual improvement projected over the medium term as battery and electric vehicle exports expand. Additionally, most of Hungary’s external liabilities consist of foreign direct investment and equity rather than debt, reflecting low rollover risk and thereby mitigating risks associated with the country's external debt burden. Gross external debt, at 86% of GDP in Q2 2024, has declined and is projected to continue this trend. Moreover, a substantial volume of intra-company loans reduces rollover risk associated with foreign investment flows.

Finally, Hungary's public debt profile displays strong resilience to external shocks, supported by a strategic focus on domestic financing. Domestic institutions held a significant 40.3% of government debt at end-2023, while households account for 26.3% through a well-developed domestic retail bond programme, minimising reliance on foreign capital⁴. The share of foreign currency-denominated central government debt at 29% as of end of |September 2024 remains below the debt management agency’s 30% strategic threshold, underscoring controlled exposure to currency risk (29% of central government debt). Additionally, the average maturity of HUF-denominated debt is stable at 5.0 years at end-2022, while foreign currency debt maturity extended to 9.2 years in 2022, reflecting a longer-term debt structure.

Credit challenges: an elevated public debt burden, weak governance metrics with lingering uncertainty regarding the inflow of substantial EU funds, sustained budget deficits, and heightened vulnerability to external shocks.

Elevated public debt continues to weigh on Hungary's credit rating. The debt-to-GDP ratio stood at 73.4% in 2023, with Scope forecasting a modest increase this year to 73.9% due to rising interest costs and a large budget deficit. Although strong growth prospects and improvements in the primary balance support fiscal consolidation, the growing interest-payment burden, projected at 4.8% of GDP in 2024, challenges budgetary targets⁵.

The 2023 budget deficit exceeded the government’s target, with an outcome of 6.7% of GDP (up from an initial 3.9%), attributed to weaker VAT revenues and higher interest costs. For 2024, the government targets a deficit of 4.5% of GDP, while Scope expects a slightly higher deficit of 4.8%, reflecting continued weakness in economic activity and substantial interest payments. Additionally, public sector wage growth is set to elevate the government wage bill to 10.4% of GDP in 2024, up from 9.8% in 2023, placing upward pressure on fiscal expenditures. To address deficit targets, the government has prioritised efficiency in public investment, deferring HUF 675bn (0.9% of GDP) in projects and aims to bolster revenue by increasing taxes on banking and financial transactions, alongside adjustments in the energy sector.

Scope projects an accelerated reduction in the deficit to 3.9% in 2025, slightly above the government’s 3.7% target. This adjustment reflects current fiscal deviations and expected discretionary spending decisions influenced by the upcoming 2026 general elections. However, inflation-linked retail bonds, accounting for two-thirds of retail issuance, are expected to yield savings of around 1% of GDP in 2025 due to lower average inflation affecting coupon payments. Furthermore, extra profit taxes from 2022 and 2023 will partly remain in effect, positively contributing to 2024 tax revenues. Although Scope expects fiscal consolidation to proceed gradually, it will provide sufficient support for a stable debt trajectory in the medium term.

Hungary’s credit ratings are further constrained by weak governance indicators and remaining uncertainties regarding substantial EU fund inflows. While Hungary has addressed some barriers to EU funding—including compliance with judicial reforms required for horizontal enabling conditions, securing approval for EUR 12.2bn in 2021-2027 cohesion funds, and receiving pre-financing of EUR 920m in 2024 for the Recovery and Resilience Plan (RRP)—access to the EUR 9.5bn remaining in the country’s RRP and EUR 6.3bn Cohesion Policy funding suspended in the frame of the so-called conditionality procedureis conditional on meeting 27 ‘super milestones’ set by the European Commission. Of these, 22 have been completed. Scope expects that Hungary’s allocation under the 2021-2027 Multiannual Financial Framework and Recovery and Resilience Facility will be maintained, though disbursements are likely to be extended over a longer timeline, impacting fiscal and growth projections. Projects financed by these EU funds are expected to play a central role in modernising Hungary's energy grid, enabling a shift in refining capabilities to process Brent crude oil alongside Russian oil. This modernisation aligns with EU strategic interests, supporting broader regional energy security, and thus also supporting Scope’s view that EU funds for these projects will eventually be released.

Finally, Hungary’s resilience to external economic shocks, while improved, remains constrained by its high dependence on external demand, reliance on foreign capital, and substantial energy import dependency. These vulnerabilities necessitate stronger economic buffers than those of peer countries to mitigate global economic and geopolitical risks. This is further emphasized by Hungary's limited monetary policy flexibility compared to major central banks. As a small, open economy, Hungary is highly reliant on demand from EU trading partners. A slower-than-expected recovery in external demand poses a risk to GDP growth, impacting revenue generation. Additionally, Hungary’s dependency on foreign capital, including for the automotive and manufacturing sectors, exposes it to global investor sentiment shifts. Delays in export-oriented projects or EU fund disbursements could also worsen the current account and limit economic growth. While Hungary’s reserves are currently deemed adequate, further accumulation would strengthen its buffer during periods of heightened risk. Hungary’s reliance on imported energy, particularly from Russia, compounds these vulnerabilities. Russian gas accounts for roughly two-thirds of Hungary’s total gas imports, leaving the country susceptible to supply disruptions. While Hungary is exploring short-term LNG deals with Azerbaijan and Turkey to diversify its energy sources, it continues to secure new agreements with Russia, heightening its exposure to geopolitical risks.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

Downside scenarios for the rating and/or Outlooks are (individually or collectively):

1. A protracted fiscal deterioration that materially weakens debt sustainability.
    
2. Hungary’s external metrics deteriorate significantly, and reserve adequacy weakens substantially, for example, due to cuts in the disbursement of EU funds and/or notably constrained energy supplies or supply chain disruptions.

Upside scenarios for the long-term ratings are (individually or collectively):

1. Public finances improve, resulting in a significant reduction in public debt above Scope’s expectations in the medium term.
    
2. Materially improved external metrics, supporting reserve adequacy.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s Sovereign Quantitative Model (SQM) provides a first indicative credit rating of ‘bbb+’ for Hungary. This ‘bbb+’ first indicative rating receives no uplift from the SQM’s reserve-currency adjustment and no negative adjustment from the political-risk adjustment. This results in a final SQM indicative credit rating of ‘bbb+’ for Hungary. On this basis, the final SQM quantitative rating of ‘bbb+’ is reviewed by the Qualitative Scorecard (QS) and can be adjusted by up to three notches depending on Hungary’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states identified by the SQM.

Scope identified the following QS relative credit weaknesses of Hungary: i) resilience to short-term shocks; and ii) governance factors. Conversely, Scope did not identify QS relative credit strengths for Hungary. On aggregate, the QS generates a one-notch negative adjustment affecting Hungary’s credit rating, resulting in the final BBB long-term ratings. A rating committee has discussed and confirmed these results.

Factoring of environmental, social and governance (ESG)

Scope explicitly factors in ESG issues within its ratings process via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

In terms of environmental factors, Hungary has a mid-range SQM score. While scores for emission intensity compare favourably to peers, Hungary receives mid-range scores for natural disaster risk and the ecological footprint of consumption compared with available biocapacity. The country faces transition risks due to the transformation of its coal region and energy-intensive industries, with electricity consumption expected to rise. Hungary continues to rely on Russian fossil fuel imports, posing a high exposure to energy supply shortages amid uncertainty surrounding the Ukraine conflict.

In social risks, Hungary scores low in the SQM for old-age dependency but compares favourably against peers regarding income inequality and labour force participation. Despite improvements in the labor market, employment gaps persist. Housing inadequacy and a shortage of affordable rental housing hinder social mobility. Adverse demographic trends pose challenges to long-term growth prospects.

In governance risks, Hungary scores poorly relative to European peers, with a 'weak' QS adjustment. Hungary's ranking in Transparency International's Corruption Perceptions Index is the lowest among EU members, reflecting governance issues related to the rule of law and judicial independence. This has resulted in a delay in the disbursement of certain EU funds.

Rating Committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. European Commission - National medium-term fiscal-structural plan Hungary, 4 November 2024
2. Hungarian Investment Promotion Agency, 15 January 2024
3. MNB Statisztika – Selected annual debt service indicators
4. MNB Statisztika – Financial accounts of the Hungarian economy
5. European Commission - National medium-term fiscal-structural plan Hungary, 4 November 2024

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 4.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation    YES
With access to internal documents                                  NO
With access to management                                            NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Jakob Suwalski, Senior Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 26 January 2024.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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