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Diversified economy, deficit policies support Hungaryʼs rating, Moodyʼs says

Hungaryʼs (Baa3 stable) credit profile is supported by a diversified economy closely integrated into European supply chains, fiscal policies that have kept the budget deficit below the Maastricht threshold and its commitment to gradual fiscal consolidation and debt reduction, Moodyʼs Investors Service said in an annual report released this week.

Photo by Daniel J. Macy / Shutterstock.com

Moodyʼs expects Hungaryʼs economy to contract by 4.8% this year due to the effects of the coronavirus pandemic. On the other hand, the rating agency expects the countryʼs economy to rebound in 2021, with predicted GDP growth reaching 4%.

"The coronavirus outbreak will cause Hungaryʼs economy to contract in 2020 and lead to a temporary increase in the debt burden to 73.6% of GDP this year," says Steffen Dyck, a Moodyʼs vice president - senior credit officer and the reportʼs author. "The significant and sustainable reduction in Hungaryʼs external vulnerabilities has increased the sovereignʼs ability to withstand external shocks."

The report notes that the countryʼs public debt - which stood at 66.3% of GDP at the end of 2019 - remains a key credit challenge. In addition, Hungary also has relatively large annual gross borrowing requirements given the short average maturity of government debt of less than four years, Moodyʼs says.

Upward pressure on the rating could develop if Hungaryʼs economic and fiscal metrics – after the coronavirus pandemic – were to improve again quickly, resulting in a significant reduction of the public debt burden closer to the median of similarly rated peers. Structural reforms aimed at improving non-cost competitiveness, which help to boost potential growth in the economy, would also be positive, the report argues.

However, the agency would consider post-pandemic signs of a weakened commitment by policymakers to contain the budget deficit or achieve primary surpluses to ensure a continued reduction in the debt burden a negative factor. In addition, the introduction of policy measures that would weaken the economic growth outlook, which in turn endangers the downward trajectory of the governmentʼs debt ratio, would also be negative, the report concludes.