Credit ratings agency Fitch Ratings has revised the outlook on Hungary's long-term foreign and local currency ratings to negative from stable over the country's worsening economic outlook. Fitch rates Hungary at BBB for foreign currency debt instruments and and at BBB+ for local currency instruments.

"The negative outlook reflects the continued deterioration in Hungarian and European economic prospects, which combined with on-going pressure on Hungary's balance of payments and currency, increase the risk that Hungary's external and public debt profile will worsen by more than anticipated when its sovereign ratings were downgraded last November," Fitch sovereign team director David Heslam said in a statement.

In October 2008, Hungary borrowed $25 billion to stave off economic collapse, with the International Monetary Fund (IMF) leading the rescue plan.

"Contrary to our expectations at the time, the IMF-led support package has not yet cemented macroeconomic and financial stability," Heslam said.

Fitch forecast that Hungary's real gross domestic product (GDP) would contract by four per cent in 2009, compared to the one per cent figure targeted by the government and IMF. Budapest would also find it hard to meet its 2.6 per cent budget deficit target for 2009, as "risk aversion and tight domestic liquidity have contributed to ongoing strains in government debt markets."

The IMF-led support package has alleviated short-term fiscal and external financing concerns, but has not prevented the depreciation of the Hungarian currency and further international support could be needed in the near future, Fitch said.

Hungary's foreign debt is already high, estimated by the credit agency at 99 per cent of GDP at end-2008 and forecast to rise to 129 per cent of GDP by the end of 2009. Government debt makes up the bulk of that figure and could incease to 88 per cent of GDP in 2009, compared to 73 per cent two years earlier, Fitch said.

The forint has weakened by 15 per cent against the euro since the start of the year and 34 per cent since peaking in July 2008. Against the Swiss franc, the currency of choice for household loans in Hungary, the forint has lost 16 per cent in 47 per cent, respectively, over the same time span.

"The weakening of the forint directly increases the debt burden for holders of foreign currency debt, further depressing the economic growth outlook and increasing the likelihood of stress in the financial system," Fitch said.