Energy price surge a risk to hungary's rating, S&P says

S&P Warns of Credit Rating Risk for Hungary Amid Energy Price Surge

Hungary's Credit Rating Faces Pressure from Rising Energy Prices

By Yoruk Bahceli

Potential Impact of Energy Price Surge on Hungary

LONDON, March 11 (Reuters) - Hungary's investment-grade credit rating could be at risk if the surge in energy prices since the U.S.-Iran war accelerates and persists, a top analyst at rating agency S&P told Reuters on Wednesday. 

Historical Context: Lessons from Russia-Ukraine Conflict

If gas prices offer a repeat of what happened after Russia's invasion of Ukraine 2022, that would lead to a sharp deterioration in Hungary's current account position, raise inflation and hurt its currency, Frank Gill, S&P's lead sovereign analyst in EMEA, told Reuters.

"It certainly would put pressure on their fiscal metrics and their rating," Gill said, at a time when the country has "extremely generous" subsidies in place ahead of its upcoming election on April 12.

Current Credit Rating and Outlook

S&P rates Hungary one notch above junk territory at 'BBB-' with a negative outlook, meaning an eventual downgrade is already more likely.

Government Measures and Economic Policies

Pre-Election Economic Stimulus

Faced with the weakest economic stretch of his 15-year rule, Prime Minister Viktor Orban has launched tax cuts for families, wage hikes and other measures ahead of the vote.

Energy Subsidy Schemes

Orban has also launched a $157-million scheme to curb heating costs, tweaking a system of energy price subsidies, which cost 1% worth of economic output in 2024 and 0.5% of output last year, based on European Commission estimates.

European Union's Position on Subsidies

The European Union has said Hungary, which S&P described as having one of the most energy-intensive economies in Europe, should wind down the scheme.

Risks and Future Outlook

Budget Deficit and Upcoming Review

S&P said last year the sharp increase in Hungary's budget deficit could threaten its rating if inflation and currency market pressures rise. Its next review of Hungary is scheduled for May 29, after the election.

Gas Imports and Price Volatility

Gill noted that while Hungary imports most of its gas from Russia, prices are linked to Europe's TTF benchmark, which doubled to 65.50 euros per megawatt hour when the war broke out. It has since come back to around 50 euros, but is still up 50% compared to where it was in February.

However, gas market prices are far lower than levels above 300 euros they touched in mid-2022.

Consequences of a Downgrade

A downgrade to junk territory is particularly painful for borrowers as it prompts forced selling from investors whose mandates require them to only hold investment-grade paper. 

Regional Comparison

Belgium, which the agency rates AA and Slovakia, rated A+, both with negative outlooks, were also vulnerable, factoring in their fiscal positions and energy imports, Gill said.

(Reporting by Yoruk Bahceli; Additional reporting by Gergely SzakacsEditing by Amanda Cooper)