(MENAFN- ING) The big picture

Márton Nagy, the Minister of National Economy, has this Tuesday announced changes to the government's deficit plans. In contrast to the previous strategy of lowering the deficit-to-GDP ratio year by year, the new target is to keep it stable at 2024 levels. Previously, the goal regarding the primary balance (the budget balance excluding net interest payments) was to keep it balanced at around zero. Now, the target is a small primary shortfall of around -1%.

The main message is that, given the current macroeconomic situation and the new economic policy measures, the government cannot reduce the deficit. That said, the deficit target will not be raised either.

By the numbers

The deficit targets for 2025 and 2026 were both increased to 5% of GDP. Consequently, debt-to-GDP is expected to stagnate at approximately 73.5% next year. The original deficit target was 3.7% of GDP in 2025, but this had already risen to 4.3% in the latest EDP report. The 2026 budget, which included a deficit of 3.7% of GDP, was adopted by the Hungarian Parliament in the summer of 2025. However, in recent months, the government has suggested that a 4% deficit target is more realistic. Now, the targets for both 2025 and 2026 are officially 5%.

Plans for the cash flow deficit have increased, from HUF 4,774bn to HUF 5,055bn this year, and from HUF 4,218bn to HUF 5,445bn next year. This means that the nominal cash flow deficit in 2026 will be 1.227 trillion higher than previously planned.

Zoom in

To finance this increase in the cash flow shortfall, foreign currency bonds will be issued at the beginning of next year. The timing and size of this issuance may be influenced by the arrival of loans from the EU's SAFE programme. In addition to these issuances, two new measures have been introduced, providing an extra HUF 400bn in budgetary room: a HUF 192bn freeze on the general reserve. The second measure is an increase in the extra profit tax on banks, which could generate an additional HUF 180–185bn in revenue in 2026.

Details of the bank tax are also set to change. According to the proposal, the bank tax rate will increase from 20% to 30% for profits above HUF 20bn, and the deductible share of the bank tax for bond buying will decrease from 50% to 30%. According to our back-of-the-envelope calculations, this incentive will keep the extra demand for Hungarian government bonds from banks roughly unchanged in 2026 if the details do not change.

What they're saying

Márton Nagy emphasised that he does not foresee any further risk to next year's deficit as he does not anticipate any additional fiscal easing measures. He said that credit rating agencies will not change their stance due to the increase in deficit targets and new fiscal measures, as they had already anticipated a deficit of around 5% next year (Moody's had estimated a similar figure, while Fitch had estimated 4.5%). He added that a cut in interest rates next year would be positive for the economy.

What we think

Discussions regarding the 2026 minimum wage increase are ongoing, based on the three-year wage settlement made at the end of 2024. This agreement includes a 13% increase in the minimum wage for next year, and we believe that the government's bottom line is at least 10%. As a compromise, the Ministry could offer a 1ppt reduction in social security contribution tax, which would cost an additional 160bn HUF (0.2% of GDP) in the budget next year. This is not included in the 5% deficit target.

Moody's will decide on Hungary's sovereign credit rating on 28 November. Before the announcement, we estimated a 50% chance of a downgrade. Now, however, the odds are clearly skewed towards a downgrade to 'Baa3'. Regarding Fitch, the stable outlook makes an outright downgrade on 5 December less likely; however, we see a significant chance of a switch to a negative outlook. Last but not least, S&P's plan is clear: a sharp rise in Hungary's budget deficit, coupled with higher inflation and currency market pressure, could threaten Hungary's credit rating, which is currently at the lowest level of investment grade.

How the market feels

While the recent budget announcement by the Ministry of National Economy was more of an adjustment to reality, the markets sold off. This announcement closely follows the news of a financial agreement ('financial shield') between the US and Hungary. On top of this, the energy-related agreement and positive global risk sentiment helped Hungarian assets to gain.

The timing of these announcements appears deliberate: the positive news helped cushion the impact of the subsequent negative update, reducing market risk. Still, investor sentiment remains uneasy, likely due to those looming sovereign rating decisions.

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