Sharp rise in Hungary's deficit, inflation could harm credit rating, S&P Global says

By Gergely Szakacs

BUDAPEST (Reuters) -A sharp rise in Hungary's budget deficit, if coupled with higher inflation and currency market pressure, could threaten Hungary's credit rating, S&P Global said, as public spending promises mount in the run-up to a tightly contested 2026 election.

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, which S&P Global estimates are already worth some 2% of economic output.

On Tuesday, Orban said his government would launch a pension top-up from January, targeting a key demographic with an extra month of payment despite a fresh warning from Fitch Ratings that Hungary's deficit cuts would be slower than expected.

"One of the downside dimensions that we are watching, among others, is the developments to Hungary's near- and medium-term fiscal position," S&P Global told Reuters. In April, it lowered the outlook on Hungary's BBB- ratings to negative from stable.

S&P said its baseline forecast saw higher budget deficits than the government's targets, taking the possibility of additional public spending promises into account.

In mid-October, S&P projected Hungary's budget deficit at 4.5% of economic output this year and 4.25% in 2026. The government now expects a deficit of between 4 and 4.5% this year and around 4% next year.

"Should Hungary's fiscal path materially deviate from our forecast, and particularly if coupled with elevated inflation and compounding currency market pressures, risks to the rating level would build," it said in an emailed reply to questions.

As an example of the fiscal pressures, Hungary spent 536 billion forints ($1.61 billion) in February under an existing pension top-up scheme, adding to a large shortfall at the start of 2025.

Hungary's central bank has left its benchmark rate at the European Union's highest level of 6.5% for more than a year amid uncertainty over the inflation outlook. Government price controls have kept a lid on inflation in the run-up to the vote.

($1 = 333.79 forints)

(Reporting by Gergely SzakacsEditing by Gareth Jones)