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Fitch affirms Hungary 'BBB' rating with stable outlook

Ratings

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

"The 'BBB' ratings reflect the Hungarian economy's strong structural indicators relative to peers and record of stable growth fueled by investment," 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 projects Hungary's GDP growth will average an "above potential" 4.4% in 2022 and 2023. It said Next Generation European Union funding will provide "significant stimulus" from H2 2022, but noted that the disbursement of those funds hinges on the resolution of legal disputes.

Fitch said inflation could peak at an annual average 5.8% in 2022, amid "more evident" overheating risks, before dropping to 3% - level with the National Bank of Hungary's mid-term target - in 2023.

The agency acknowledged the central bank's tightening, but said the government's six-month freeze on mortgage interest rates raises "concerns over policy coordination and predictability".

Fitch sees the general government deficit, relative to GDP, narrowing from an estimated 7.9% in 2021 to 5% in 2022 and 4% in 2023. It said Hungary's state debt is expected to "slowly decline" from an estimated 78.6% of GDP at end-2021 to 74.9% by end-2023.

Hungary's low level of FX debt and high level of forint debt with Hungarian households "helps mitigate some of the risks related to high debt levels", Fitch said.

Fitch said it expects relations with the EU over rule-of-law and LGBTQ issues as well as adherence to rulings by the Court of Justice of the European Union (CJEU) to "remain tense" and pose "the key risk" to resolution of disputes over Next Generation EU funding. However, the rating agency added that "these rifts are unlikely to escalate to a level that materially threaten Hungary's investment and growth prospects" in its baseline scenario.

Fitch said a big increases in Hungary's state debt ratio as well as a deterioration in governance standards or the business climate could lead to a rating downgrade.

A "sustained" decline in the state debt ratio and "stable and sustainable" mid-term growth "aided by an improved business environment and predictable policymaking, without the emergence of macroeconomic imbalances such as large current account deficits or prolonged, high inflation" could result in an upgrade, it added.

In a post on Facebook on Saturday, Finance Minister Mihály Varga said Fitch's affirmation of Hungary's investment-grade rating was "good news for the weekend".

"In their report, they acknowledge Hungary's economic performance, and expect strong growth and improving balancing indicators in the coming period," he added.

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