Fitch affirms Hungary 'BBB' rating with a stable outlook

Ratings

Fitch Ratings on Friday affirmed Hungary's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a stable outlook, according to a report by news agency MTI.

"Hungary's ratings are supported by strong structural indicators relative to 'BBB' peers and by its record of stable economic growth fueled by investments," Fitch said.

"These are balanced against high public debt, a record of unorthodox fiscal-and-monetary policy moves, and a worsening of governance indicators in recent years," it added.

Fitch said the stable outlook reflects its expectations of sustained economic growth, gradual improvement in external balances and fiscal consolidation resulting in an improvement of the state debt ratio in the next three years.

Fitch expects Hungary to reach an agreement with the European Commission regarding its Recovery and Resilience Facility (RRF) plan by the end of September and to secure European Union funding that would otherwise have been financed through market issuance.

Fitch forecast GDP growth of 5.1% for Hungary in 2022, supported by "strong carry-over effects and robust domestic demand" in H1, albeit followed by a slowdown in H2 as high inflation and a weak external environment weigh.

It sees economic growth slowing to 2.4% in 2023 due to weaker private consumption, lower investments and a dampened external environment. It noted downside risks mainly related to a potential halt of gas deliveries from Russia. Fitch said that Hungary is "highly vulnerable" to potential cuts in its gas supply, most of which is imported from Russia.

Fitch put average annual inflation at 11.3% in 2022, while acknowledging that government price caps on utilities, fuel and some staple foods would shave 4.3 percentage points off headline CPI. The rating agency expects the National Bank of Hungary (MNB) to continue tightening in the coming months and puts the base rate at 12.25% by year-end.

Fitch said it believes windfall taxes, the postponement of state investments, and a reduction of public sector spending will allow the government to meet the 4.9%-of-GDP deficit target for 2022, if Hungary secures EU funding. It sees state debt relative to GDP stagnating at "around 77%" in 2022 and declining "toward 70%" by 2024.

Fitch forecasts the current-account deficit will reach 7% of GDP in 2022, mainly because of a widening trade gap.

The ratings agency said a sustained decline in state debt levels relative to GDP as well as stable and sustainable medium-term growth, aided by an improved business environment and predictable policymaking, without the emergence of macroeconomic imbalances, could lead to an upgrade of Hungary's rating.

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