S&P Global Ratings has downgraded Hungary’s sovereign credit outlook from stable to negative, citing concerns over the country’s economic direction under Prime Minister Viktor Orban. The decision preemptively answers those questions with concerns about escalating fiscal unsustainability and the likely consequences of Orban’s proposals to ramp up government spending. Meanwhile, Slovenia’s credit rating remains affirmed at a positive outlook following scrutiny from Moody’s.
Against the backdrop of rising uncertainty over Central Europe’s economic climate, the downgrade could hardly come at a worse time. S&P is in the midst of reviewing Slovakia now. If such a cut in spending is announced on April 25, it could lead to a negative outlook change or possibly a downgrade itself. Furthermore, the general economic environment is impacted by variable currency exchange rates and global trade patterns.
Concerns Over Hungary’s Economic Policies
In fact, S&P’s recent downgrade of Hungary’s credit outlook to negative underscores S&P’s—and much of the international community’s—serious concerns with the country’s fiscal state. Among other things, the agency signaled that Hungary is at risk of deteriorating fiscal and external stability over the next two years. These risks are the result of a perfect storm. These are increasing trade protectionism, declining global demand, and closing capital inflows. Scant budgetary space and elevated interest expenses, against a backdrop of pre-election budgetary loosening, make a complicated picture worse.
The Hungarian government plans a budget deficit of 3.7% of GDP in the next fiscal year, decreasing slightly to 3.5% by 2026. This aggressive budget strategy has raised concerns from investors and financial analysts. At the same time, they’re understandably concerned that much of this new spending might exacerbate today’s economic headwinds.
“Risks to Hungary’s fiscal and external stability over the next two years come from rising trade protectionism, weakening global demand, narrowing capital inflows, and elevated interest spending amid pre-election budgetary loosening.” – S&P
Hungary’s credit rating is now equal to Romania’s. Both countries are located literally on the knife’s edge of investment grade. If left unchanged, this positioning will continue to scare away foreign investment and economic growth for the state as well.
Slovenia Maintains Positive Outlook Amid Scrutiny
As Hungary languishes under continual downgrades, Moody’s reports that Slovenia has successfully defended its superior rating outlook. The rating affirmation alludes to a greater confidence in Slovenia’s macroeconomic stability and fiscal consolidation. Moody’s analysis is further testimony to the relative strength of Slovenia’s economy, despite particularly grim forecasts on the horizon for some of its regional counterparts.
This positive outlook for Slovenia is a world away from Hungary’s recent downgrade and Slovakia’s stable but precarious outlook. Slovakia’s wage growth data will be watched extremely closely by investors. Those are due to be released on the same day that S&P releases the results of its review. Such data could offer invaluable perspectives on the economic wellbeing of the area.
Currency Fluctuations and Trade Tensions
The EUR/USD currency pair is on a roll in the forex markets. This increase coincides with continued weakness of the US Dollar. In early trading in Europe, the pair continued to consolidate on its recovery gains, now holding below the 1.1400 level. Analysts expect this trend to continue. Their most recent issue makes the case that US-China trade updates will continue to be a bellwether, fueling volatility in international markets.
In the current climate of US-China trade tariffs and tit-for-tat tariffs, there are clear direct and indirect effects on currencies around the globe. The cavalcade of potential concessions from former President Donald Trump has ignited a rosy risk sentiment. Yet this optimism hasn’t translated into a stronger US Dollar—giving the EUR/USD currency pair the runway needed to keep flying higher.
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