In recent months, Hungary’s ruling party has stirred considerable controversy with proposals to introduce a new law that would grant the government sweeping powers to silence, fine, or even ban organizations that receive any form of foreign funding. Critics argue that the measure is designed to stifle dissent and civil society under the guise of national sovereignty and security. The proposed legislation has triggered a strong backlash within the European Union.

At the European Commission, 26 Members of the European Parliament have already called for a complete suspension of all further EU funding to Hungary in response to what they view as an escalating erosion of democratic values. Although the vote on the law has been delayed until the autumn session, the threat of a potential funding freeze continues to cast a shadow over Prime Minister Orbán’s administration. This is not the first time Hungary has found itself at odds with the EU. The country has faced repeated warnings, penalties, and even legal action for its ongoing defiance of key EU principles, including the rule of law, judicial independence, and media freedom. While domestic political uncertainty remains a pressing concern, the situation is further complicated by geopolitical risks. Hungary’s economy is heavily export-driven, particularly in the automotive sector, one of the largest in the European Union. Any deterioration in international relations or disruption in trade flows could therefore have significant economic repercussions.

Despite ongoing political and geopolitical uncertainty, Hungary’s economy is showing tentative signs of recovery. According to the European Commission’s recently published Spring Forecast, GDP is expected to grow by 0.8% in 2025, with growth accelerating to 2.6% in 2026. These projections suggest a gradual rebound, though the broader outlook remains fragile. Inflation has moderated somewhat compared to previous highs, but the risk of sudden external shocks continues to pose a significant threat. Complicating matters further, Hungary’s debt-to-GDP ratio is projected to rise to 74.1% this year, while the government budget deficit is expected to remain elevated, reaching -4.6% by year-end. One of the most persistent challenges remains inflation. Contrary to easing trends elsewhere in the region, Hungary experienced a renewed uptick in price pressures in the first quarter of 2025. The European Commission expects inflation to remain stubbornly high throughout the year, adding further strain to household purchasing power and complicating monetary and fiscal policy responses.

Despite the broader uncertainties, Hungarian government bond spreads have shown notable resilience, with signs of continued tightening. As illustrated in the figure, the current spread between the German Bund and REPHUN 2035 stands at approximately 185 basis points.

REPHUN 1 ¾ 2035 Yield vs. German Bund Yield

Source: Bloomberg, InterCapital

While there is potential for this spread to narrow further, upside risks remain and cannot be overlooked. As discussed earlier, the outlook for economic recovery and growth supports the case for continued spread compression. Furthermore, the absence of additional bond issuance for the remainder of the year may provide further support by limiting supply-side pressures. However, risks persist. Ongoing geopolitical tensions and increasing political friction with the European Union could undermine investor confidence and reverse the current tightening trend. Should these risks materialize, spreads could widen quickly, reflecting the market’s sensitivity to both domestic and external developments.