German-based ratings agency Scope Ratings finds Hungaryʼs financial stability high, its debt structure improving, exposure to foreign-currency movements weak, and legal conflict with EU institutions troubling in a recently completed case study investigating CEE economies.
The study attributes Hungaryʼs relative credit strength compared to Croatia and Romania to the consolidation of public finances, and a significant improvement in public debt structure and funding sources.
The agency points out that, while the countryʼs debt levels are still high, "the debt management office’s prudent debt funding strategy aimed at developing the domestic investor base, keeping foreign currency debt within a 15-25% share of total debt range, and mitigating cross-currency exchange rate risks by using euro swaps for all foreign-currency obligations," ameliorated the situation, making Hungaryʼs economic outlook better. Scope also points out that slower growth is the key risk to the countryʼs debt sustainability.
The Hungarian economy appears to be weak in resilience to short-term external shocks, the report states. The reason behind this is the countryʼs "high share of forex lending in total lending to non-financial corporations at around 45% in Q2 2018", along with the halving of foreign-currency reserves in the last five years, now standing at only EUR 24 billion.
This reflects the banking sectorʼs conversion of foreign-currency loans and the self-financing program repayment of the governmentʼs foreign-currency debt. On the other hand, Scope adds that the reserves-to-short-term-debt ratio is adequate at approximately 180%.
Analyzing the recent events and policy decisions of the Hungarian government, the agency highlights that while politics "have been characterized by stability and policy continuity over recent years, the current government’s consolidation of political power has come at the expense of independent institutions, especially affecting the central bank and judiciary, fair democratic processes and a free media".
Furthermore, the report classifies the Orbán governmentʼs recent legal quarrels with the European Unionʼs institutions about issues with the government’s respect for human rights, democracy and the rule of law as a significant weakness. Still, Scope acknowledges: "Hungary displays a relatively high degree of financial stability, due in part to robust economic growth," despite some institutional weaknesses.