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Fitch Affirms Hungary 'BBB' Rating With Negative Outlook

Ratings

Fitch Ratings affirmed Hungary's "BBB" sovereign rating with a negative outlook at a scheduled review on Friday, according to a report by state news wire MTI.

"Hungary's ratings are supported by strong structural indicators relative to 'BBB' peers, a record of economic growth fuelled by investments and solid net FDI inflows," Fitch said.

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

The negative outlook on the rating reflects "risks around the credibility of macroeconomic policy", Fitch said, noting the cost of energy support measures, sectoral windfall profit taxes, and high inflation. Monetary policy transmission is being "hampered" by targeted mortgage interest rate caps, it added.

Fitch acknowledged that Hungary's external position had "substantially improved" this year on the falling cost of energy imports, but said the country's high energy dependence on Russia remains "an important risk factor".

Fitch continues to expect that Hungary will reach an agreement on accessing its European Union funding, but said the timing and size of transfers from Brussels remained uncertain. "The latest developments in EU-Hungary relations are consistent with our view that disbursements of [Recovery and Resilience Facility] funding are unlikely before end-3Q23," it added.

Fitch projects Hungary's GDP will stagnate in 2023 as domestic demand contracts amid high inflation. It sees growth recovering in 2024-2025, averaging 3%.

The rating agency projects Hungary's year-on-year inflation, which peaked at 26.2% in January, will fall to 8-10% by end-2023, supported by base effects, easing global commodity prices, slowing domestic demand, and a stronger forint.

Fitch forecasts a budget deficit of 4.1% of GDP in 2023, a little over the 3.9% government target due to the rating agency's more pessimistic growth outlook.

In 2024, Fitch pointed to the expected recapitalization of the National Bank of Hungary (MNB), which could come to 0.4-0.5% of GDP, as a risk factor to budget performance.

Fitch expects Hungary's state debt, relative to GDP, to continue to decline, falling to 68.1% in 2023 and dropping under 60% by 2027.

The agency sees the current account deficit narrowing to 3.4% of GDP in 2023.

Commenting on the banking sector, Fitch said high capital ratios and liquidity buffers underpinned local lenders' stability, but added that state interventions had weighed on the sector's profitability.

"An improvement in governance and economic policy likely reflecting a combination of rule of law enhancements and a policy mix that will contribute to tackling existing imbalances and enhancing the credibility of macroeconomic policy" could, individually or collectively, lead to an upgrade of Hungary's sovereign rating, Fitch said.

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