S&P: Hungaryʼs junk rating affirmed with stable outlook

S&P upgraded Hungary to "BB plus", with "stable" outlook, on March 20, 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.

After the publication of S&Pʼs review, the Hungarian forint eased to 311.36 to the euro from 310.38 previously on the interbank forex market.

Hungaryʼs economy is benefiting from a cyclical recovery, enabling estimated real GDP growth of 2.4% on average between 2015 and 2018, which should facilitate a gradual decline in its still-high public debt, S&P said on Friday. But "we continue to regard Hungaryʼs potential growth as weaker than peers," it added. The "stable" outlook "balances our assessment of the benefits to Hungaryʼs balance sheet from an external surplus, amid a cyclical recovery, against generally less-predictable policymaking.

Explaining its assessment of relatively low growth potential, S&P highlighted Hungaryʼs demographics which "remain weak." Net emigration, including the emigration of highly skilled workers, has increased materially compared with before the 2008-2009 global financial crisis.

Since 1992, the population has declined by 5%. Labor participation, particularly among women, is among the lowest in Europe. "We think these factors contribute to what we consider to be Hungaryʼs weaker potential growth compared with peers such as Poland and Turkey," S&P said.

S&P expects that Hungaryʼs government will make gradual progress on reducing still-high gross general government debt to GDP to 74% of GDP by 2018 from an estimated 78% as of end-2025. "There are risks to this expectation, however, including the governmentʼs track record of prioritizing state asset purchases over debt reduction, as well as electoral considerations," S&P said. S&P deemed the efforts for "self-financing of Hungaryʼs central bank a source of risk.

"We view increased exposure of domestic banks to sovereign debt as a vulnerability as it reduces their ability to raise exposure to government debt during times of stress. Furthermore, nonresidents hold about 30% of commercial general government local currency debt. Although we view this as positive because it diversifies the governmentʼs funding, the 2008-2009 global financial crisis illustrated the rapidity with which nonresidents can sell local currency bonds if investor confidence falters," it said.

"We could raise the ratings if the government pursued policies that encourage investment and promote sustainable growth, such that risks to its balance sheet and Hungaryʼs monetary conditions eased. Conversely, we could lower the ratings if Hungaryʼs public finances weakened materially, most likely through an increase in quasi-fiscal activity, or if external vulnerabilities once again built up," S&P concluded.

Earlier this week Citigroup said in an analysis that Hungary can be back into investment grade first at Fitch Ratings when that agency reviews the country in November. But other analysts recall that all rating agencies have already disappointed Hungaryʼs government, eagerly expecting an upgrade to investment level, at every review so far this year

Fitch Ratings raised Hungaryʼs outlook to "positive" from "stable" on May 22.  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, a further review this year is expected from Moodyʼs on November 6, and from Fitch Ratings on November 20.