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Fitch affirms Hungary ‘BBB-’ rating, ‘positive’ outlook

Ratings

Fitch Ratings affirmed Hungaryʼs sovereign rating at ‘BBB-’, just over the investment grade threshold, in a scheduled review on Friday.  The outlook for the rating is ‘positive,’ Hungarian news agency MTI reported.   

"Hungaryʼs ratings balance strong structural indicators compared with ʼBBBʼ medians against relatively higher public and net external debt, a higher level of policy unpredictability and macroeconomic volatility. An improving trend for these latter factors is reflected in the Positive Outlook," Fitch said.

Fitch acknowledged a significant pickup in GDP growth to 4.2% in 2017, supported by EU-funded investments, strong wage growth and policy stimulus, and said growth is likely to remain at "around 4%" in 2018. It noted, however, that Hungary "has a track record of higher economic volatility" than the ʼBBBʼ median, as well as of "unorthodox policy decisions."

Hungaryʼs growth potential is "constrained" by unfavorable demographics, labor shortages and the expected fall in EU transfers when the current funding cycle winds up in 2020, it added.

Fitch said it expects the economy to slow down after 2018, as monetary and fiscal policy may tighten and as EU fund disbursements slow.

Fitch noted that Hungaryʼs public finances have improved in recent years, and said that it expects the authorities to continue to keep the general government deficit under the 3%-of-GDP threshold over the forecast horizon.

State debt, at 71.7% of GDP at the end of 2017, is on the decline, but remains well above the ʼBBBʼ median of 40.7%, the ratings agency stressed.

Current account surpluses since 2010 have "materially reduced" Hungaryʼs net external debt, which Fitch called a "traditional weakness" of the countryʼs sovereign creditworthiness. Fitch said it expects continued, albeit lower, current account surpluses, to keep net external debt on a downward trend over the forecast horizon.   

Improvements in banking, doing business

Addressing banking, Fitch said the sector has strengthened over the past two years as portfolios were cleaned up and profit generation capacity "substantially improved."

"In Fitchʼs view, the risk of damaging policy interventions has reduced, supporting stability in the sector," it added. 

Hungaryʼs development and doing business indicators are "broadly better" than ʼBBBʼ medians, reflecting greater economic development and integration with Western Europe, Fitch said.   

"Fitch estimates that politics and economic policy are likely to remain stable after the April 2018 general elections," it added. 

Fitch said the main factors that could lead to a ratings upgrade include a continued reduction in external indebtedness and improved external liquidity supported by current account surpluses; increased confidence in the economic policy framework and improved business environment; and a sustained decline in state debt as a percentage of GDP.

Factors that could lead Fitch to downgrade the outlook to ʼstableʼ include a rise in net external debt, an increase in state debt as a percentage of GDP; and a deterioration in the economic policy framework, the ratings agency noted.

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