S&P warns that the surge in energy prices could affect Hungary's credit rating

S&P's top analyst warned on Wednesday that Hungary's investment grade credit rating may be threatened if energy prices continue to rise. Frank Gill, S&P’s lead sovereign analyst for EMEA, said that if gas prices were to rise as they did after Russia invaded Ukraine in 2022, it would cause a severe deterioration of Hungary’s current account, increase inflation, and damage its currency.

Gill stated that the "extremely generous "?subsidies are in place to prepare for its April 12th election.

S&P has rated Hungary at 'BBB+', which is one notch higher than junk?territory. The outlook is negative and a downgrade in the future seems more likely.

Viktor Orban, facing the weakest economic period?of 15 years of his rule, has introduced tax cuts for families and wage increases ahead of the vote. Orban also announced a $157 million scheme to reduce heating costs. The plan involves tweaking the system of energy price subsidies that, according to estimates by the European Commission, cost 1% of economic output and 0.5% last year.

The European Union said that Hungary, which S&P described has having one of Europe's most energy-intensive economy, should end the scheme. S&P warned last year that the rapid increase in Hungary's deficit budget could affect its rating, if inflation and currency market pressures continue to rise. The next S&P review of Hungary will be on May 29, following the elections.

Gill pointed out that although Hungary imports the majority of its gas from Russia prices are tied to Europe's TTF standard, which doubled?to 65.50 euro?per megawatt-hour when war broke out. The price has now dropped to about 50 euros but it is still up 50% compared to February.

Gas prices are lower now than they were in mid-2022, when they reached levels of over 300 euros.

It is painful for borrowers when their paper is downgraded to junk status. This happens because investors who are mandated to only hold investment-grade papers will be forced to sell it.

Gill noted that both Belgium and Slovakia, rated A+ by the agency, had negative outlooks. This was due to their fiscal position and energy imports. (Reporting and editing by Amanda Cooper; Additional reporting by Gergely szakacs)

(source: Reuters)