Fitch: Hungary will not escape recession, the state budget looks bad

Hungary’s decision to raise its 2023 budget deficit target to 5.2 percent of GDP from 3.9 percent makes reaching next year’s 2.9 percent target “more challenging”; at the same time, inflation is expected to fall sharply, Fitch Ratings said on Friday.

Fitch forecast the 2024 deficit would reach 3.7 percent of GDP in 2024 and 2.8 percent in 2025. Hungary’s state debt relative to GDP should continue to decline gradually in 2023-2025 on the back of “solid” GDP growth and the return of primary surpluses, but the ratio will remain above the ‘BBB’ category median, Fitch said.

Fitch acknowledged press reports suggesting that the European Commission could unlock up to 13.3 billion euros of Hungary’s suspended cohesion funds by the end of 2023 and said the disbursement of the EU funds would “take some pressure off” public finances and be growth-positive. “While an agreement with the EC is our baseline expectation, we remain cautious regarding the timing and size of eventual disbursements,” the rating agency added.

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Fitch noted that Hungary’s GDP contracted by an annual 1.7 percent in the first half, as household consumption was hit by high, albeit easing, inflation, while high borrowing costs and cuts in state spending weighed on investment activity.

As high-frequency indicators suggest continued weakness in household spending in Q3, Fitch lowered its full-year GDP forecast to -0.9 percent from 0 percent. It sees growth recovering and averaging 3 percent in 2024-2025, but pointed to downside risks linked to further delays of EU funding and spillover from potential fiscal consolidation efforts. Fitch rates Hungary ‘BBB’, two notches over the investment grade threshold, with a negative outlook.