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S&P downgrades Hungary outlook to negative

Ratings

Standard&Poor’s Ratings Services said Friday it downgraded its outlook for Hungary to negative from stable because of the weakening perspective for sustained consolidation of the country’s public finances.

Standard&Poor’s affirmed Hungary’s ‘BBB+’ long-term and ‘A-2’ short-term sovereign credit ratings. “We believe that the increasing political incentives and pressure to dilute the fiscal reforms ahead of upcoming elections, coupled with the increasing cost of external borrowing, will interrupt Hungary’s progress in reducing its deficit from 2009 and will keep the debt burden rising,” said S&P credit analyst Frank Gill.

S&P said political opposition to budgetary reform is building, as evidenced by a firm rejection of several key government reforms in a referendum on March 9. The defeat in the referendum will have only a minor effect on this year’s budget deficit but it “confirms fading appetite among Hungarians to continue with the consolidation process,” S&P said. S&P said the announcement of various proposals to reduce Hungarians’ tax burden between 0.7% to 1.4% of GDP in 2009 point in the same direction.

Moreover, the possibility of new opposition referenda, which amount to votes of no confidence in Prime Minister Ferenc Gyurcsány’s fiscal reform plan, will further undermine the government’s goal of reducing public sector debt dependency. “The strong increase in the government’s borrowing costs and weaker-than-expected economy have already begun to eat into the fiscal buffer arising from Hungary’s budgetary overperformance in 2007,” Gill said. “Due to past consolidation measures, the budget deficit should fall further in 2008, to 4.5% of GDP, short of the government’s target.

Furthermore, we forecast that budgetary deficits will remain unchanged in 2009 and 2010. We also expect the debt ratio to continue rising to over 68% of GDP in 2010. Lack of a clear perspective for stabilization could eventually lead to a downward revision of the ratings,” S&P said in its statement. “Conversely, the demonstrated ability to tighten public finances over the entire political cycle and not only the H1 of it would provide strong support to the ratings.” (MTI-Econews)

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