S&P affirms Hungary ‘BBB-/A-3’ ratings; outlook stable

"Hungaryʼs substantial external surpluses and its track record of fiscal restraint support the sovereign ratings," S&P said. "Moderate long-term growth prospects, high public debt, and an impaired monetary transmission mechanism are key constraints on the ratings," it added.

S&P sees Hungaryʼs real GDP growth picking up slightly to about 3.0% in 2017, before moderating to just under 2.5% on average in 2018-2020. Growth in 2017 will be supported by a wage agreement initiated by the government, a recovery in absorption of EU funding, fiscal stimulus measures, real wage and employment gains, and stronger private sector balance sheets, it said. In the medium term, however, poor demographics, worsened by net emigration, low labor participation, and a large and encroaching public sector, as well as weaknesses in the business environment, low productivity and an overheating labor market, will weigh on growth, it added.

S&P said Hungaryʼs banking sector "remains hampered" by substantial dependence on non-resident financing, the sizable - albeit declining - stock of legacy NPLs, and residual dependency on FX financing, but forecast positive credit growth after contractions in 2011-2015.

In spite of tax cuts and higher spending in the 2017 budget, S&P assumes that, going forward, fiscal slippage will be "negligible," resulting in general government deficits of 2.3% of GDP on average in 2017-2020. The ratings agency forecasts state debt will fall to about 65% of GDP in 2020, from 70.7% in 2016.

S&P noted that the fiscal forecast does not calculate on contingent risk, such as capital injections, state acquisitions or spending on capital projects.

"Such risks are underpinned by what we regard as relatively limited predictability and stability of policy-making, which results from only moderate checks and balances between government branches," it added.

Stable outlook, falling debt expectation

S&P said the stable outlook on Hungaryʼs ratings reflects its expectation that the countryʼs continued cyclical recovery and its contained headline fiscal performance will support a gradual reduction in general government debt. The outlook also factors in the assumption that the economyʼs current account balance will stay in surplus, supporting Hungaryʼs strong external balance sheet, it added.

"We could raise the ratings if government debt declines faster than we project and/or if we observed a further reduction in sovereign debt-servicing costs, or if the transmission of monetary policy improves," S&P said.

"The ratings could come under pressure if Hungaryʼs public finances weakened materially, if we were to expect a sustained reversal in the declining debt-to-GDP ratio, if contingent liabilities rise rapidly, or if external vulnerabilities build up again contrary to our current expectations. We could also lower the ratings if we saw the transparency of key institutions weakening further, especially if we anticipated an eventual fiscal risk associated with such weakening," it added.

S&P upgraded Hungary last September, putting the country back in investment grade on stronger economic performance, fiscal improvements, declining external financing and leverage needs and "a gradual moderation of activist monetary policies."

All three big ratings agencies have put Hungary at the bottom of investment grade.