Hungary’s ratings reflect the countryʼs membership in the European Union, strong governance indicators, high GDP per capita and reduced external debt, Fitch said. The ratings are constrained by high state debt, a weak banking sector and a track record of unorthodox economic policy that “has contributed to low private investment and affected growth potential,” it added.
Fitch projected Hungary’s economic growth will remain “subdued” relative to its peers, but forecast GDP growth will accelerate from 2.1% in 2016, to 2.6% in 2017 and 2018, as the new EU funding cycle ramps up and domestic demand benefits from improvements on the labor market, as well as accommodating monetary and fiscal policies.
Fitch said a continued reduction in external indebtedness, a sustained decline in state debt as a percentage of GDP and stronger GDP growth potential, supported by an improved business environment, could trigger a positive rating action. A renewed increase in the state debt-to-GDP ratio and a deterioration in the economic policy framework could lead to a negative rating action, it added.
Fitch assumes that the foreign parents of Hungarian banks would support their local units if they come under severe financial stress. It expects Hungary’s relations with the EU to “remain on track despite occasional tensions.”
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