Hungary's pre-election spending pledges put economic health at risk: S&P

Hungary’s government is jeopardising its economic health with pre-election spending pledges that hinder efforts to reduce its budget deficit and stabilise the Forint, according to S&P Global Ratings.

S&P’s report, released on Tuesday, follows the announcement of a new lifetime tax break for women with children, which the Economy Ministry estimates could eventually cost up to $2.4 billion annually. The agency currently holds a BBB- rating on Hungary’s debt, just above junk status.

With this generosity and the potential for additional spending ahead of next year’s election, S&P predicts that Hungary’s public debt-to-GDP ratio will peak in 2026, as the country’s goal of reducing the budget deficit to 3% becomes harder to achieve.

Other risks identified include weak external demand, reduced access to European Union funding, and the possibility of further depreciation of the Forint, Bloomberg reports.

“The parliamentary elections in 2026 could lead to new tax and spending pledges,” according to S&P Global Ratings credit analyst Gabriel Forss. “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.”

Furthermore, S&P also warned that further budget slippage could negatively impact investor sentiment. While the Forint has been trading at a four-month high against the Euro this week, investors have repeatedly cautioned about a potential relapse into last year’s selloff as the elections draw nearer.

The Forint’s depreciation in 2024 has already added 1.4 percentage points to general government debt as a share of GDP, according to S&P. The central bank, which held its final rate meeting under its outgoing leadership on Tuesday, has also been advocating for fiscal caution

“We note that Hungarian government bond yields and the forint foreign exchange rate have been sensitive to Hungary’s economic policy developments. This suggests market reaction to government overreach could further complicate consolidation efforts,” S&P said