Moody's has reaffirmed Hungary's sovereign credit rating at Baa2 with a negative outlook in its latest scheduled review on 30 May, keeping the country just one notch above the lowest investment-grade category, despite weakening growth prospects, persistently high public debt, frozen EU funds, and a worsening external environment.

The rating agency last downgraded Hungary’s outlook to negative six months ago, citing these same grounds, stopped short of a downgrade, giving the government some time to address these issues. It is not standard practice to follow a negative outlook with immediate action unless deterioration is sharp and unavoidable, financial website Portfolio.hu observed.

The decision means Hungary remains at investment-grade, according to all three major rating agencies.

The government welcomed the rating review, highlighting what it described as the "solid foundations" of the Hungarian economy, including high employment, record-low jobseeker numbers and rising real wages.

The picture is less rosy than that. Moody's raised fresh concerns that Hungary could permanently lose access to a large portion of its frozen EU funds due to ongoing rule-of-law disputes. The loss of these funds would weigh heavily on both the country's growth prospects and fiscal stability, the agency warned.

Moody's also flagged the risks of fiscal slippage ahead of the 2026 parliamentary elections after the government announced major tax cuts for families. Hailing the measure as Europe's largest tax cut, mothers with at least two children will enjoy lifelong exemption from personal income tax from 2029. The measure is being implemented gradually starting with mothers of three from October 2025.

The rating agency sharply revised the 2025 growth forecast to just 1%, around the median consensus of analysts, from 2.9%, which stands in sharp contrast to the government's 2.5% target, revised from 3.4% earlier this year, a target many economists describe as entirely unrealistic. Growth is expected to remain subdued in 2026 as well, at just 2.8%, below the 4% projection of the cabinet.

Slower growth this year is raising serious doubts over the government's fiscal credibility and debt management plans. The government plans to cap the budget deficit at 3.7% of GDP in both 2025 and 2026, but with Hungary's sputtering economy, meeting these targets looks increasingly unlikely without meaningful budget consolidation.

Public debt rose 2 percentage points over the last three months to 75.5%. The government assumed the decline of state debt from 73.5% at end-2024 to 73.1% in 2025, and 72.3% by 2026, but instead it rose 2 percentage points in Q1 to 75.5%.

Credit rating agencies have already signalled concern over Hungary's fiscal discipline, and a further debt spike could tip the balance towards a downgrade. The impact of this could be compounded by the loss of EU funds and the government's prospective clash with EU institutions over the "transparency" bill.

The government received bad news on Friday, as the European Commission is expected to formally announce on 4 June that it will not extend the €650bn in Recovery Fund (RRF) beyond the 2026 deadline and is urging member states to accelerate the absorption of funds. Local media cited Politico, which was told by several officials there is no longer a legal basis to extend the expiration date.

If that unfolds, Hungary could permanently lose out on €10.4bn in RRF funding, including €6.5bn in grants and a further €3.9bn in preferential loans under the REPowerEU energy package.

These funds remain inaccessible due to the ongoing rule-of-law conditionality mechanism, which has blocked disbursements pending governance and anti-corruption reforms.

Analysts now expect the next 6-12 months to be critical in determining Hungary’s credit trajectory.

Before the rating review, chief economist of Raiffeisen Bank Zoltan Torok said that "a downgrade was only a matter of time" and that markets have so far not priced in that scenario. Hungary could be pushed to close to junk, leading to higher borrowing costs in an already precarious fiscal situation.

S&P downgraded Hungary's rating to BBB, just one notch above junk in April 2024 and Fitch will likely reverse its December outlook upgrade, retaining the BBB rating but with a negative outlook.