S&P affirmed BBB-/Stable, but watch out for the details

HUNGARY - In Brief 09 Jul 2023 by Istvan Racz

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On Friday, July 7, S&P did not change its Hungary sovereign credit rating, exactly as expected. This could be taken as completely market-neutral, but the agency's appraisal was not entirely innocent this time. S&P actually said that its Hungary macro forecast is based on the assumption that the EU will not significantly reduce its new development transfers, out of its cohesion and recovery funds, to Hungary; as a maximum, the release of these funds may be delayed. It added that a further negative rating step could follow if (a) Hungary's energy supply gets seriously endangered because of its high exposure to imports from Russia, and (b) if the EU reduces its financial transfers to Hungary to a substantial extent. Indeed, the agency expects EU transfers to Hungary to reach 4% of GDP annually after 2023. This is a clear example of a kind of soft (?) conditionality set by S&P, suggesting that Hungary could be thrown out of investment grade if no agreement on the release of new EU development funds is reached by the end of this year. The agency expects such an agreement to be reached by end-2023 on at least a part of the EU funds in question, primarily on access to the recovery fund. Fair enough. But the problem here is that the EU Commission keeps stressing in these days that the various funds are closely linked together in terms of their rule-of-law conditionality, and the set of conditions has been made so comprehensive by now that it is just next to demanding the Fidesz government to dismantle the foundations of its carefully devised political regime. In this light, it will be most important to watch the EU Commission's detailed appraisal of the government's recent jud...