HUF: S&P’s downgrades exerts additional pressure – Commerzbank

Last week after business hours on Friday, Standard & Poor’s issued a downgrade of outlook on Hungary’s sovereign debt from stable to negative. S&P already rates the issuer at 'BBB-/A-3', the lowest within investment grade, which highlights the significance of a negative outlook from here. The reasoning and emphasis of the analysis seemed to be focussed on pre-election government spending and the fiscal deficit (election is in 2026) – S&P cited persistent fiscal slippage and nearly 75% of GDP public debt as the primary reasons for a negative outlook, Commerzbank's FX analyst Tatha Ghose notes.

EUR/HUF surges past 410 on downgrade, CPI Fears

"In our view, though, given the multiple challenges the EU is likely to face as a result of the US’ altered vision of world trade and international relations, most EU countries might materially exceed their fiscal spending plans in coming years. This will be part of a broader drive, including on defence, which will be ‘planned’ or recommended, not a deviation. Meeting earlier set fiscal targets may be the last thing on the minds of most EU governments. S&P also cited the lack of access to EU funds, but it is possible that other types of EU funds may become available to Hungary as part of newer plans which will be drawn up in due course. That remains to be seen."

"But, none of this is central to our focus here. Our focus is that EUR/HUF has once again shot past the 410 mark as a result of broader risk-off moves in world markets plus the downgrade (see chart below on EUR/HUF’s reversal). The exchange rate was trying to find a way back towards the 400 level gradually, with support from cautious language (about rate cuts) by the new central bank governor. In the past week, though, a weak CPI print gave rise to market perceptions that the central bank (MNB) may resume rate cuts soon. In reality, the CPI print was not very good, hence cutting rates on that basis would amount to a disaster."

"We have been warning that the HUF’s high-beta status makes things risky at this time – because the US administration’s announcements are triggering ad hoc swings in the market, which naturally impact the high-beta assets above all others, and Hungary’s own inflation dynamics had already been struggling with FX pass-through from previous months – any further FX pass-through, even from unrelated causes, could tip the balance in the wrong direction."