Fitch cuts Hungary's outlook on worsening finances ahead of election

By Gergely Szakacs and Krisha Bhatt

Dec 5 (Reuters) - Fitch Ratings cut Hungary's credit rating outlook to 'negative' on Friday, citing a worse trajectory for public finances amid fiscal loosening in the run-up to a 2026 national election and the risk of more measures to come.

The move was widely anticipated amid a lack of progress in unlocking billions of euros in European Union funding in a third year of economic stagnation and fiscal loosening moves by Prime Minister Viktor Orban ahead of a likely closely fought ballot.

The outlook downgrade from 'stable' signals concerns pre-election spending will deepen Hungary's fiscal troubles and complicate any post-vote recovery.

Still, Fitch affirmed Hungary's credit rating at 'BBB,' which the Economy Ministry said was a "significant accomplishment" given a wave of ratings downgrades across Europe over the past year.

In power since 2010, Orban has struggled to revive the economy from an inflationary surge following Russia's 2022 invasion of Ukraine, putting a strain on Hungary's finances.

DEBT PILE TO RISE TO 74.6% BY 2027, ABOVE PEERS

The total cost of fiscal easing measures would rise to 2.1% of economic output next year, Fitch said, while Hungary's debt pile, the European Union's largest outside the euro zone, would increase to 74.6% of output by 2027, above equally rated peers.

"Frequent revisions to government's targets have weakened policy predictability and increased fiscal risks," Fitch said.

Fitch projected Hungary's budget deficit at 5.6% of output next year, above the government's 5% target.

It said there was a risk that political considerations could limit the space to boost revenues or reduce generous social support measures after the elections.

S&P Global had also revised Hungary's outlook to negative in April, citing rising risks to fiscal and external stability over the next two years.

Fitch said the lack of a credible fiscal consolidation strategy, or prolonged weak economic growth due to lower foreign direct investment, could lead to a credit downgrade.

Faster than expected fiscal consolidation or reforms boosting medium-term growth prospects could lead to a positive rating action, it said.

(Reporting by Krisha Bhatt and Gergely Szakacs; Editing by Krishna Chandra Eluri and Bernadette Baum)