Hungary lifts borrowing plan as growth prospects dim

By Gergely Szakacs

Hungary flagged another cut to its 2025 economic growth outlook on Tuesday as lower revenues and delays in European Union fund inflows hamper recovery, prompting Prime Minister Viktor Orban's government to raise its full-year borrowing plan.

Data released on Tuesday showed the budget posted a 129.5-billion-forint ($367.87 million) surplus last month, helped by corporate tax revenue and a dividend payment of 213.5 billion forints by energy company MVM.

That has narrowed the shortfall to 2.8 trillion forints for the first five months, representing 59% of an increased full-year target of 4.774 trillion.

Orban's government had hoped a rebound in economic growth would help him secure another term in next year's elections, when political analysts expect he will face the stiffest opposition challenge in over a decade.

But last week, the OECD forecast Hungary's economy would expand by just 0.9% this year, rounding off the weakest three-year stretch since Orban took power in a 2010 landslide.

"In spring, we had expected 2.5% growth but in light of the first-quarter data, this is now obsolete," Economy Ministry State Secretary Kornel Kisgergely told a news conference.

Fitch Ratings, which affirmed Hungary's credit rating at 'BBB' with a stable outlook last week, said a loose fiscal stance or weaker economic growth that prevents Hungary's debt levels from falling could lead to a rating downgrade.

Data released last week showed Hungary's economy was in a state of stagflation, with output unchanged from a year ago, while inflation ran at the EU's highest levels, preventing cuts from the 27-member bloc's joint-highest benchmark interest rate.

Orban's government initially targeted 3.4% growth this year, brushing aside a warning by the budget watchdog Fiscal Council that the assumption was too optimistic, while reserves were set too low to tackle contingencies.

Even with a spending freeze worth 0.4% of output, the 2025 deficit is seen at 4.1% of gross domestic product, above a 3.7% original target, driven in part by increased family benefits and cost-of-living support to pensioners.

Net financing needs have grown by 651 billion forints ($1.84 billion) to 4.774 trillion, also due to delays in European Union fund inflows and spending overruns, the Economy Ministry said.

Hungary aims to finance the higher deficit with more foreign currency borrowing, lifting its FX bond issuance target to 3.2 billion euros from 2.5 billion at the end of 2024. Net FX borrowing is seen doubling to 1.685 trillion forints.

Higher external borrowing will temporarily lift the share of FX debt within the total stock to 30.2% this year and 30.1% in 2026, above the debt agency's 30% ceiling. In turn, the debt agency will cut net 2025 forint bond issuance to institutional investors by some 300 billion forints.

($1 = 352.03 forints)