Morningstar DBRS Assigns BBB Credit Rating to Hungary, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) assigned Long-Term Foreign and Local Currency - Issuer Ratings of BBB to Hungary. At the same time, Morningstar DBRS assigned Short-Term Foreign and Local Currency - Issuer Ratings of R-2 (high). The trend on all credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that risks to Hungary's credit ratings are balanced. The projected gradual strengthening of economic growth is likely to bolster government revenues which, in turn, would partly offset the fiscal cost of recently adopted household support measures. Moreover, the government's very high interest burden is likely to decline, albeit only in a gradual manner, in coming years as domestic interest rates have come down significantly from their peak in 2023. The Hungarian economy is exposed to important downside risks such as high-for-longer U.S. tariffs on EU imports which would likely impact the economy through indirect trade linkages via Germany. At the same time, recent foreign investments in electric vehicle and battery production provide an upside risk to the medium-term export outlook.

Hungary's credit ratings are underpinned by its membership of the European Union (EU) and the economy's solid external position. The credit ratings assigned also reflect the sound financial condition of the domestic banking sector. These strengths are balanced against the economy's small and open nature which renders it vulnerable to external shocks. Furthermore, labour productivity levels are well below the EU average and public debt metrics are comparatively weak. While Morningstar DBRS continues to view Hungary's membership in the EU as an important anchor for the credit profile, the marked deterioration in institutional quality over the past decade weighs on the credit ratings.

CREDIT RATING DRIVERS
The credit ratings could be upgraded if one or a combination of the following occur: (1) a lasting improvement in public debt metrics; or (2) a marked improvement of institutional quality; or (3) the implementation of structural reforms which bolster the economy's growth potential, leading to a material convergence of income levels to the EU average.

The credit ratings could be downgraded if one or a combination of the following occur: (1) a marked upswing in public debt levels, driven either by persistently large fiscal deficits or a materialization of contingent liabilities from the financial sector or SOEs; or (2) a further deterioration in institutional quality.

CREDIT RATING RATIONALE
Economic Growth is Projected to Recover Only Gradually

The Hungarian economy did not show signs of a clear recovery in recent months. Real GDP expanded by 0.5% in 2024 following a contraction of 0.8% in 2023 but declined by 0.2% in Q1 2025 on a quarter-on-quarter basis. While private consumption recovered strongly from the inflation shock in 2022 and 2023, investment and export activity weakened over the past year. Real private consumption expanded by 5.1% in 2024 as households' purchasing power was bolstered by large real wage gains on the back of double-digit nominal wage growth and easing inflationary pressures. At the same time, investment continued to contract strongly with the total cumulative decline in gross fixed capital formation during 2023 and 2024 standing at 17.9%. This slump can be attributed both to a sharp pace of monetary tightening in previous years and lower inflows of EU funds on the back of the ongoing rule of law procedure with the EU. Net capital transfers from the EU decreased from 2.2% of GDP in 2022 to 0.3% in 2024.

Looking ahead, the European Commission projects economic growth to recover only gradually with annual real GDP growth forecast at 0.8% in 2025 and 2.5% in 2026. While private consumption is likely to continue to be supported by still strong, albeit decelerating, nominal wage growth, investment is projected to start recovering only in 2026. The export outlook is exposed to substantial uncertainty on how global trade tensions will evolve over the next months. While the Hungarian economy's direct trade linkages with the U.S. are comparatively small, potential high-for longer U.S. tariffs would likely impact the economy through indirect trade linkages via Germany. At the same time, recent foreign investments in electric vehicle and battery production are set to raise the economy's export capacity in coming years. In general, Hungary's credit profile is constrained by the economy's small size which in tandem with its strong integration into regional supply chains renders the economy vulnerable to global trade shocks. Furthermore, while high FDI investments over the past decades have raised the economy's international competitiveness, Hungary's labour productivity levels are still substantially below those of most other EU economies. According to Eurostat, the level of nominal GDP per person employed in Hungary amounted to only 73.3% of the EU27 average in 2023. As the working-age population is projected to decrease over the next decade, the economy's growth dynamics will increasingly rely on increases in productivity.

Budgetary Pressures Decreased but Are Likely to Remain Elevated

Budgetary pressures decreased over the past year but remain large. The general government budget deficit narrowed to 4.9% of GDP in 2024 from 6.7% in 2023. This narrowing was driven by lower subsidies and transfer payments and a cutback in public investment whereas high nominal wage growth and high interest rates drove up the public wage bill and interest expenditure. Looking ahead, the government's EU Progress Report projects the general government budget deficit to narrow to 4.1% of GDP in 2025 and 3.7% in 2026. However, Morningstar DBRS notes that these budget targets are based on assumption that economic growth will accelerate markedly with annual real GDP growth rates for 2025 and 2026 projected at 2.5% and 4.1%, respectively. Therefore, a weaker-than projected economic development constitutes a downside risk for fiscal accounts. The EC forecasts the general government budget deficit at 4.6% in 2025 and 4.7% in 2026. Bringing down the deficit over the medium-term has been complicated by recently adopted household support measures such a lifelong exemption of mothers with two or three children from personal income taxation. These measures will gradually be phased in in coming years. The National Bank of Hungary estimates the fiscal cost of these new measures to increase from 0.5% of GDP in 2026 to 0.9% in 2028. Over the next year, the cost of the measures is planned to be partially financed by the prolongation of windfall taxes for certain industries until the end of 2026 (e.g. banking sector, energy suppliers).

Public Debt Is Higher Than in Eastern European Peer Countries

Hungary's public debt metrics are weaker than those of Eastern European peers. General government gross debt amounted to 73.5% of GDP in 2024, up from 73.0% in 2023, compared with an average debt-to-GDP ratio of 52.7% for the three other Visegrad countries Czech Republic, Poland and Slovak Republic. The modest increase in Hungary's debt burden over the past year was driven the depreciation of the Forint against the Euro which raised the local currency burden of FX-denominated debt moderately. The adverse impact of higher interest rates on debt dynamics was offset by high nominal GDP growth on the back of still elevated inflation. Looking ahead, the EC forecasts general government gross debt at 74.5% of GDP in 2025 and 74.3% in 2026.

The government's interest burden increased markedly from 2.8% of GDP in 2022 to 5.0% in 2024 on the back of elevated domestic borrowing costs and as high inflation drove up the coupon payments of inflation-linked bonds. As domestic interest rates and inflation rates have come down substantially from their peaks in 2023, the EC forecasts a gradual decline of the interest burden to a still high 4.2% of GDP in 2025 and 4.0% in 2026. Downside risks for public finances result from the increase in contingent liabilities particularly with regard to state-owned enterprises. The stock of government guarantees increased from 6.3% of GDP in 2019 to 13.0% in 2023. Moreover, according to Eurostat, the liabilities of loss-making state-owned non-financial enterprises amounted to 8.9% of GDP in 2023, up from just 0.7% in 2019. Currency risks are moderate and relate primarily to the future development of the Hungarian forint (HUF)-EUR exchange rate. FX-denominated debt accounted for 29.6% of total central government debt in March 2025.

Financial Condition of Banking Sector is Sound but Large Stock of FX Loans Might Lead to Pockets of Vulnerability

The financial condition of the domestic banking sector is sound. Capital buffers of banks improved over the past two year, driven by a temporary increase in banks' profitability. The average CET1 capital ratio in the domestic banking system rose from 17.3% at end 2022 to 18.2% at end 2024. The increase in banks' profitability resulted primarily from the upswing in policy rates as the latter boosted banks' interest income on their large deposits held at the central bank. The very strong increase in domestic interest rates has so far not led to a deterioration in asset quality - notwithstanding an increase in bankruptcies. The NPL ratio decreased to 2.3% at end 2024 from 3.2% at end 2022.

At the same time, the domestic interest rate hike led to a rising stock of FX loans to domestic corporates which, in turn, might weaken asset quality in future. FX loan growth towards non-financial corporations accelerated markedly over the past three years as corporate borrowers sought to lower limit their interest costs given the strong increase in domestic policy rates. In December 2024, FX loans towards non-financial corporations accounted for 49.8% of total corporate loans. Looking ahead, pockets of vulnerability might emanate from corporate borrowers who do not have natural hedges in the form of FX revenues. This applies particularly to the domestic commercial real estate sector which accounted for 27% of total FX corporate loans in December 2024. In terms of mortgage loans, the pass-through of higher interest rates was dampened by a high share of fixed-rate mortgages. Furthermore, the repayment capacity of mortgage borrowers is supported by high nominal wage growth and low levels of household debt (2024: 17.0% of GDP). In general, the interlinkages between domestic banks and the domestic government are large. According to the ECB, total credit to the domestic government accounted for 19.8% of the banking sector's total assets, the third-highest share across EU countries. In view of the asset quality risks emanating from the large stock of FX loans to domestic corporates, Morningstar DBRS applies a negative qualitative adjustment to the `Monetary Policy and Financial Stability' building block assessment.

Credit Profile Benefits from EU Membership but Deterioration in Institutional Quality Weighs on Credit Ratings

Hungary's institutional quality has weakened markedly over the past decade. While Morningstar DBRS continues to view Hungary's membership in the EU as an anchor for institutional quality, the country's ranking in different Worldwide Governance Indicators such as "Rule of Law" and "Voice & Accountability" is now substantially below those of most Eastern European EU peers. Political tensions between Hungary and the European Commission remain elevated due to the ongoing rule of law procedure, the accompanying partial freezing of EU funds and, more recently, the proposed law on foreign-funded NGOs in Hungary. In view of the EC, the latter law would restrict the operations of such NGOs markedly. In terms of the domestic political landscape, headwinds for the ruling Fidesz party of Prime Minister Victor Orban have increased on the back of the inflation shock and the rise of the newly founded center-right Tisza party which is currently leading opinion polls. The next parliamentary elections are scheduled for April 2026. Politico's Poll of Polls currently puts the Tisza party at 42% compared to 36% for Fidesz.

External Position is Solid

Hungary's external position benefits from a marked improvement in the current account balance in recent years. In 2024, the current account posted a surplus of 2.4% of GDP in 2024, compared to a deficit of 8.4% in 2022. This improvement resulted from a decrease in global energy prices which lowered the economy's energy import bill. Furthermore, overall import demand remained subdued. Looking ahead, the EC forecasts a moderate narrowing of the current account surplus to 2.0% of GDP in 2025 and 1.5% in 2026 based on the expectation that a strengthening in domestic demand will bolster import volumes. While the economy had a negative net international investment position of 36.2% of GDP at end 2024, a large part of external liabilities is related to the high stock of foreign direct investment in Hungary (foreign shareholdings and intercompany lending equity). Morningstar DBRS regards the rollover risk of intercompany lending to be substantially lower than for other kinds of external debt. The external indebtedness of the general government (2024: 26.2% of GDP) and the financial sector (12.7%) is moderate.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a significant effect on the credit analysis.

Social (S) Factors
The following Social factor had a significant effect on the credit analysis: Human Capital and Human Rights. Hungary's GDP per capita stood at USD 23,272 in 2024 which is relatively low when compared with EU peers mainly due to a still low labour productivity. Access to quality healthcare and other basic services is widespread. Morningstar DBRS has taken this factor into account in the Economic Structure and Performance building block.

Governance (G) Factors
The following Governance factor had a significant effect on the credit analysis: Institutional Strength, Governance, and Transparency. According to the World Bank Worldwide Governance Indicators in 2023, Hungary's ranks for Rule of Law (63.2 percentile) and for Government Effectiveness (62.7 percentile) were significantly lower than those of most other EU countries. The following factor had a relevant effect on the credit analysis: Bribery, Corruption and Political Risks. Hungary's position in the `Control of Corruption' indicator (2023: 54.7 percentile rank) has deteriorated in recent years and is significantly below the EU average. These factors have been taken into account in the Fiscal Management and Policy and Political Environment building blocks.

There were no Environmental factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments at https://dbrs.morningstar.com/research/455782.

Notes:
All figures are in HUF unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024), https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Government of Hungary (Hungary's Annual Progress Report 2025, April 2025), Government Debt Management Agency (Monthly Report, March 2025; Investor Presentation, January 2025), National Bank of Hungary (Inflation Report, March 2025; Housing Market Report, May 2025; Financial Stability Report, May 2025; Statistics), Hungarian Central Statistical Office, European Commission (European Economic Forecast Spring 2025, May 2025; 2024 Rule of Law Report, July 2024), Eurostat, European Central Bank (ECB), IMF (World Economic Outlook April 2025; International Financial Statistics; Hungary: 2024 Article IV Consultation August 2024), OECD, European Environment Agency, World Bank, Bank for International Settlements and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

This credit rating concerns a newly rated issuer. This is the first Morningstar DBRS credit rating on this issuer.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/455781.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Yesenn El-Radhi, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 6 June 2025
Last Rating Date: Not applicable

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