Moody's downgraded its outlook on Hungary's investment-grade sovereign rating from stable to negative, attributed to the potential continued freeze on EU funds and the weak external environment, the rating agency announced on November 29. The change in outlook was the first for three years and shows the way analysts have turned gloomy on the Hungarian economy.

The negative outlook signals an increased risk of a credit rating downgrade in the next 6-24 months. Moody's left the Hungarian rating unchanged at 'Baa2,' an investment grade. The next grade down is "Baa3", the last before speculative or "junk" under Moody's rating scale. 

The negative outlook reflects downward risks tied to Hungary’s economic, fiscal, and debt prospects, stemming from institutional and governance weaknesses. The agency highlighted the significant risk of Hungary losing access to substantial EU funding if the country fails to meet the EU's conditions relating to improving its rule of law, which have been weakened under Prime Minister Viktor Orban's semi-authoritarian rule.

This could jeopardise Hungary's GDP growth and fiscal metrics. Between 2021 and 2027, EU allocations to Hungary are set to reach 24% of its 2023 GDP including RRF funds, cohesion funds, and agricultural subsidies.  While 14% of GDP is currently accessible, the remaining 10% depends on Hungary meeting specific targets.

Moody's also expressed concerns about Hungary meeting the 27 "super-conditions" required to unlock RRF and REPowerEU funds, equivalent to 5% of GDP.

With strained EU negotiations and the 2026 deadline for fund requests, there is an elevated risk of missing out on a significant portion of this funding. Furthermore, approximately €1bn cohesion funds, or 0.5% of GDP, could be permanently lost by the end of 2024 if no agreement is reached.

Moody's pointed to the weak German economy, Hungary’s largest trading partner, as another critical risk factor, increasing the country’s vulnerabilities especially in the vehicle industry, which is deeply integrated into German supply chains.

While foreign direct investments in Hungary's electric vehicle and battery manufacturing sectors are expected to boost export capacity, weaker external demand could lead to significantly lower utilisation of new production facilities, negatively impacting Hungary’s medium-term economic outlook.

These negative economic risks also pose risks to Hungary's fiscal strength, according to Moody's. Structurally weaker growth could lead to reduced revenue-generating capacity and rising public spending, they warn.

Moody's economic forecast is well below the government’s projections, with growth set to rise from 0.7% to 1.9% in 2025 to average 3% between 2026 and 2028. Parliament is expected to approve the 2025 budget bill later this month, assuming a 3.4% growth.

In addition, there is also a risk of reversing fiscal consolidation ahead of the 2026 parliamentary elections, Moody’s warned.

Hungary's fiscal strength is also hampered by relatively high public debt at 73.4% of GDP and the high debt financing costs. Payout on the popular inflation-linked PMAP government bond accounted for 13% of the central government debt in October, according to Moody’s. The pressure on the budget in debt financing will ease in 2025 as annual average inflation is set to drop to 4% in 2025 from 17%  in 2023.

Moody’s also noted that Hungary's creditworthiness is burdened by institutional weaknesses, including adherence to the rule of law, interference with civil society, and concerns about central bank independence and monetary financing.

The outlook is likely to return to stable if there is a significant and sustained improvement in the relationship with the EU and further progress towards meeting the super milestones the EU expects in the negotiations, according to the credit review.

All three big credit rating agencies continue to put Hungary in the investment-grade category, thanks to the country's stable and resilient economy, the national economy ministry commented on the report, without addressing the revision of outlook. In line with the Orban regime's narrative, it continued to blame the Ukraine war for the economy's problems.

Hungary's financing position is stable and secure, and the government is committed to a disciplined fiscal policy and reducing the budget deficit and state debt levels. This is reflected in the 2025 budget bill, which targets a 3.7% deficit, from 4.5% in 2024 it added.

The ministry went on to claim that Hungary's assessment on international financial markets is favourable, and Hungarian government securities remain popular. Strong investor and market confidence is demonstrated by successful securities auctions and inward FDI, the ministry said, pointing to big investments underway by Chinese companies such as battery makers CATL and SEMCORP and EV maker BYD.

Standard and Poor's left Hungary's debt rating unchanged on October 25, but expressed reservations about the feasibility of the government's economic policy targets. Fitch will issue the last scheduled review of the year on December 6.