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Moodyʼs lifts Hungaryʼs junk rating outlook to positive

Ratings

Rating agency Moodyʼs Investors Service raised the outlook on Hungaryʼs "Ba1" sovereign long term issuer rating, one notch under investment grade, from "stable" to "positive" in a scheduled review Friday evening, Hungarian news agency MTI reported.

Previously, analysts views were divided between no change and an outlook upgrade to "positive", while Moodyʼs listed Hungary as "not on watch".

After the publication of Moodyʼs review, the Hungarian forint jumped to 313.36 to the euro from 314.93 previously, but eased back to 314.44 within an hour on the interbank forex market.

Affirming the rating, key drivers for the outlook change were the downward trend in the government debt stock which is likely to be sustained in the coming years, with the government debt ratio projected to decline to 74.3% of GDP this year and further, to below 73% in 2016, and to the improving economic outlook as the Hungarian economyʼs external vulnerability has been greatly reduced through the resolution of the foreign-currency debt overhang of both households and the banking sector, Moodyʼs said.

This should have a positive impact on domestic demand, it added.

Moodyʼs expects the foreign-currency share in the government debt stock to decline further next year, probably to around 30% or even lower from around the current 34%.

Moodyʼs also believes that greater policy stability, in particular with regards to the banking sector, should help revive bank lending and support economic growth prospects.

Concurrently, Moodyʼs also affirmed the Ba1 rating for the National Bank of Hungary (MNB) and changed the outlook to "positive" from "stable", as Hungaryʼs government is legally responsible for the payments on MNBʼs bonds.

Rationale for affirming the rating itself is that the public debt ratio is significantly higher than most peers at the Baa3 rating level and will likely decline only gradually in the coming years. In the meantime, the Hungarian government has very large borrowing requirements, exposing it to higher refinancing risks than many higher rated peers. Hungaryʼs gross borrowing requirements stand at around 20% of GDP per year compared to Baa3-rated emerging market peers, which typically have borrowing needs of 5-10% of GDP, Moodyʼs said.

The rating agency also left Hungaryʼs long-term local-currency bond and deposit ceilings at Baa2, the long-term foreign-currency bond ceiling and short-term foreign currency bond ceiling at Baa2 and P-2, respectively, and the long-term and short-term foreign currency bank deposit ceilings at Ba2 and Not Prime (NP), respectively, unchanged.

Moodyʼs would consider upgrading Hungaryʼs rating if the countryʼs economic and fiscal metrics continued to improve, resulting in a further reduction of the public debt ratio. In particular, an upgrade would be dependent on further confirmation that economic policy-making is more stable than in the past, in turn supporting sustained economic growth, fiscal consolidation and a further reduction of external vulnerabilities.

Conversely, downward pressure on the governmentʼs bond rating could arise following signs of a weakened commitment by policymakers to contain the budget deficit to less than 3% of GDP, and/or the introduction of policy measures that would negatively impact the economic growth outlook, which in turn would endanger the downward trajectory of the governmentʼs debt ratio, Moodyʼs said.

Moodyʼs downgraded Hungary to "Ba1" from "Baa3" on November 24, 2011.

The highest rating ever for Hungary at Moodyʼs was A1 from November 2001 until December 2006.

The agency started rating Hungary in July, 1989, with "Baa2".

Earlier this year on September 18, Standard & Poorʼs Ratings Services affirmed Hungaryʼs junk rating at "BB plus", with "stable" outlook, also in a scheduled review, disappointing analystsʼ expectations for a raise in the outlook to "positive".

S&P upgraded Hungary to "BB plus", with "stable" outlook, on March 20 of this year, skipping an initial outlook upgrade on the previous "BB" rating also with "stable" outlook, to bring it in line with Fitchʼs and Moodyʼs ratings, all one notch below investment grade.

On May 22, Fitch Ratings affirmed Hungaryʼs "BB plus" sovereign credit rating, but raised the outlook on the rating to "positive" from "stable", citing ongoing, 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.

Hungary was knocked down from investment grade in 2011 and early 2012 by all three agencies.

The pre-publication of review schedules has been mandated by the EU. The schedules do not mean that ratings or outlooks would necessarily be modified, the agencies said earlier.

According to published schedules, one more review is expected this year, by Fitch Ratings on November 20.

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