Moody's Affirms Hungary Baa2 Rating, Stable Outlook

Ratings

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Moody's Investors Service affirmed Hungary's Baa2 sovereign rating, two notches over the investment grade threshold, with a stable outlook at a scheduled review on Friday, according to a report by state news wire MTI.

The affirmation "balances credit strengths and challenges", Moody's said, pointing to a "solid" medium-term growth outlook, driven by factors such as availability of skilled workers, one of the highest wage-adjusted labor productivities among European Union countries, good infrastructure, one of the lowest corporate income tax rates among EU countries and the country's integration into European manufacturing production networks.

Hungary's fiscal strength is "robust" with a "moderately high" debt burden and "relatively strong" debt affordability, the rating agency added.

Hungary's main credit challenge relates to "weaknesses at the institutional level" which have been the source of a "contentious" relationship with the EU that is the cause for uncertainty about the transfer of EU funding, Moody's said.

The stable outlook reflects Moody's view that risks to Hungary's credit profile are "balanced".

Hungary's economic strength is expected to "remain robust" in light of significant investments, while the debt burden continues on a downward path, albeit with a deterioration in debt affordability in 2023-2024.

Moody's expects Hungary will ultimately receive most of its EU funding, "in a noisy, step-by-step process", and the impact from a delay of the transfers on economic growth and public finances will be "limited".

The agency noted that risks stemming from Hungary's exposure to Russian energy imports had "diminished compared to 2022".

Moody's projects Hungary's economy will stagnate in 2023, but sees GDP growth picking up to 3% in 2024, supported by returning real wage growth, big foreign investments, and expanded export capacity.

A projected decline in the working-age population, fostering innovation and productivity, and ensuring continued income convergence, present challenges to Hungary's medium-to-long-term growth outlook, Moody's said.

Moody's expects Hungary's fiscal deficit, relative to GDP, to narrow to 4.2% in 2023 and to 3.5% in 2024 as "robust" revenue growth related to high inflation and tax measures offsets expenditure growth. It sees the state debt ratio falling to 67.8% of GDP in 2024.

Factors that could lead to an upgrade of Hungary's rating include an improvement in the relationship with the EU in combination with the implementation of reforms addressing the European Commission's concerns, an increase in trend growth, and "more material" fiscal consolidation, Moody's said. A further deterioration of EU relations, lower trend growth or a reversal of fiscal consolidation would be credit negative, it added.

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