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Fitch affirms Hungaryʼs junk rating, raises outlook to positive

Ratings

Fitch Ratings affirmed Hungaryʼs "BB plus" sovereign credit rating, one notch below investment grade, in a scheduled review Friday evening. At the same time, it raised the outlook on the rating to "positive" from "stable", citing on-going, albeit slow, decline in government debt, the planned cut in the special bank levy in Hungary next year, and the conversion of household forex mortgages to forint debt.

While Hungarian authorities are eager to see the country upgraded, the affirmation did not suprise the local market today, because analysts at Fitch have said in an interview with Reuters late in April that an improvement was unlikely at this stage. However, extending hope with the outlook upgrade, the agency was more forthcoming than expected by most analysts. Standard & Poorʼs and Moodyʼs also rate Hungary one notch below investment grade, but their outlook is "stable".

After the publication of Fitch Ratingʼs review, the Hungarian forint strengthened to 306.87 to the euro from 307.68 previously on the interbank forex market. Within half an hour, it sank back to 307.01. "Fitch Ratings has revised the Outlook on Hungaryʼs Long-term foreign and local currency Issuer Default Ratings (IDR) to Positive from Stable and affirmed the IDRs at "BB plus" and "BBB minus" respectively. The issue ratings on Hungaryʼs senior unsecured foreign and local currency bonds have also been affirmed at "BB plus" and "BBB minus", respectively. The Country Ceiling has been affirmed at "BBB" and the Short-term foreign currency IDR at "B", the agency said in a statement.

"Hungaryʼs external metrics have markedly improved. Since 2010, Hungary has recorded high current account surpluses, at 4.2% of GDP in 2014, reflecting strong goods and services exports following industrial expansion and lower external interest payments linked to external debt deleveraging," Fitch Ratings said. "Fitch forecasts the (general government) deficit to remain in the range of 2.0%-2.5% in the medium term as tax cuts are offset by cyclical improvement.

This would support a continued slow decline in government debt from the current high level of 76.9% of GDP. Fitch expects debt will reach 75.2% of GDP by 2016 and 66.1% by 2022", the agency said, adding that it expected GDP growth "will slow to 2.9% in 2015 and 2.3% in 2016 (from 3.6% last year) due to slower disbursement of EU funds as the new 2014-2020 cycle starts only gradually".

Noting that next yearʼs draft budget contains a cut in the special bank levy, Fitch said it shows the Hungarian governmentʼs intention to achieve a gradual normalization of the banking business environment. "Although regaining market credibility is going to take some time, Fitch sees this development as potentially positive for the rating. Meanwhile, the conversion of the large stock of forex mortgage loans, equivalent to 12% of GDP has considerably reduced householdsʼ exposure to exchange rate volatility", the agency said.

Fitch Ratings listed the main factors that could lead to an upgrade as greater policy stability and predictability along with an improved business environment, for example resulting in stable and predictable framework for the banking sector; continued, sustained reduction in external indebtedness supported by current account surpluses; and reduction in the public debt ratio. Raising the outlook to "positive", and assuming the Hungarian authorities will maintain fiscal discipline broadly in line with the targets included in the Convergence Program submitted to the EU in April 2015, Fitchʼs sensitivity analysis "does not currently anticipate developments with a material likelihood of leading to a downgrade.

However, relaxation in the fiscal stance and/or policy missteps leading to higher macro-financial risks, including crystallization of contingent liabilities, would be rating negative," it added.

Earlier, on March 20, Standard & Poorʼs Ratings Services raised Hungaryʼs sovereign credit rating to "BB plus" from "BB" without previously raising the outlook on the "BB" rating, citing improving growth prospects and reduced external vulnerability. The first to review the Hungarian sovereign in the scheduled series, Moodyʼs Investors Service has not updated its long-term public debt view on Hungary since March 6. Moodyʼs rates Hungary "Ba1", with "stable" outlook.

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