Moody’s: Hungaryʼs growth robust, public debt a constraint

Still elevated public debt nevertheless remains a key credit constraint, notes the report.

"Hungary’s credit profile is constrained by still sizable public debt, which stood at 73.3% of GDP at the end of 2017," said Steffen Dyck, Moody’s vice president, senior credit officer, and co-author of the report. "Despite strong nominal GDP growth, we expect the government debt ratio to only fall gradually by 2019, to slightly below 70% of GDP, still well above similarly rated peers."

Moody’s forecasts growth of 4.3% for 2018, and 3.4% for 2019. A tightening labor market and resulting wage increases will bolster disposable income and private consumption, it says, while European Union funds will continue to support investment growth. However, Hungary’s growth outlook is also exposed to adverse developments affecting the automotive industry, such as U.S. tariffs. Challenges to Hungary’s growth model also stem from its labor market and skills mismatches, as well as relatively low productivity growth and competitiveness issues.

Although Hungary’s EU accession process supported institutions and capacity improvements, Moody’s notes that its institutional strength continues to be constrained by an unorthodox policy environment, a history of unpredictable regulatory changes, and concerns over transparency. At the same time, the authorities remain committed to keeping deficits below the 3% of GDP Maastricht threshold, and this will support a gradual reduction in the general government debt ratio. Moody’s expects the fiscal deficit to widen to 2.3% of GDP in 2018, from 2.2% in 2017, before narrowing to 2%, and then 1.8% of GDP in 2019 and 2020, respectively.

However, according to the European Commission’s most recent estimates, Hungary’s structural deficit widened to 3.4% of potential GDP in 2017 and will widen further this year to 3.8%, the largest among regional peers. While policies supporting a sustainable reduction in the foreign currency share of government debt and a lower reliance on non-resident funding have increased Hungary’s resilience to currency volatility and reduced government liquidity risks, Hungary faces relatively large annual gross borrowing requirements, according to the report.

Hungaryʼs rating could experience upward pressure if the country’s economic and fiscal metrics continue to improve and public debt falls more quickly than expected and closer to the median for similarly rated peers. Structural reforms that stimulate private investment, improve non-cost competitiveness, and boost potential economic growth would similarly be credit positive.

Conversely, notes Moody’s, the rating could come under downward pressure if there are signs that policymakers’ commitment to containing the budget deficit or achieving primary surpluses to ensure that the debt burden continues to fall has weakened. Policy measures that weaken the growth outlook, endangering the downward trajectory of government debt to GDP, would also be negative, the press release adds.