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Fitch improves Hungaryʼs rating

Fitch Ratings revised the outlook on Hungaryʼs long-term foreign and local currency Issuer Default Ratings (IDR) from "stable" to "positive," and affirmed the IDRs at "BBB-" in a scheduled review on Friday, state news wire MTI reported.

Among the key ratings drivers to which Fitch assigned a "high" weight were the "marked improvement" in Hungaryʼs net external debt position, to an estimated 9% of GDP in 2017 (from 53% in 2014), as well as the countryʼs current account surplus, which averaged 3.7% of GDP in 2014-2016.

Fitch assigned a "medium" weight to the steady decline in Hungaryʼs state debt relative to GDP and reduction in non-residentsʼ holdings of that debt; the acceleration in GDP growth, to an expected 3.7% in 2017 and 3.5% in 2018, up from 2.2% in 2016, driven mainly by domestic demand but also by recovering investment; and improved banking sector liquidity, profitability and asset quality.

Fitch said that Hungaryʼs GDP per capita and governance indicators are higher than the "BBB" medians, reflecting the countryʼs greater economic development and integration with Western Europe, while "Doing Business" indicators are also stronger than its peers.

On the other hand, GDP growth volatility has been higher than peers, and unorthodox policy moves in the past and a high regulatory burden have affected private investment, it added.

Fitch noted that polls predict the incumbent ruling Fidesz party will win general elections to take place in April 2018, "suggesting policy continuity." At the same time, Fitch also pointed to public tensions between Hungary and the European Union and said a "serious deterioration in the relationship could have potential adverse consequences on the economic outlook and government finances in the medium to long term."

Factors that could lead to an upgrade of Hungaryʼs rating are a continued reduction in external indebtedness and improved external liquidity supported by current account surpluses; a sustained decline in state debt relative to GDP; and increased confidence in the economic policy framework and improved business environment that would support stronger GDP growth potential, Fitch said.

Factors that could lead Fitch to revise the outlook on the rating to "stable" are a renewed rise in state debt relative to GDP, and a deterioration in the economic policy framework, potentially leading to adverse developments in external or government finances.

Commenting on the Fitch revision on Sunday, Minister for National Economy Mihály Varga attributed the improvement to the countryʼs stable economic growth. He noted marked improvement in the performance of the construction, automotive and pharmaceuticals industries over the past several months, adding that growth had not been paired with a wave of borrowing by households, businesses or the government.