S&P keeps Hungarian debt below investment grade

Ratings

Standard & Poor’s is keeping Hungary’s debt ratings in junk category, just below investment grade, the credit assessment agency announced after markets closed on Friday. Risks cited by S&P include “increasing opaqueness around key institutions, such as the central bank” as well as programs that may discourage the central bank from fighting inflation.

“Standard & Poorʼs Ratings Services affirmed its ʼBB+/Bʼ long- and short-term foreign and local currency sovereign credit ratings on Hungary. We also affirmed our ʼBB+ʼ long-term issuer credit rating on the National Bank of Hungary,” said a statement from S&P issued Friday. “The outlooks on Hungary and MNB are stable.” 

The assessment from S&P noted that Hungary has improving fiscal performance, and that the country is less vulnerable to outside risks, thanks to a concerted effort to reduce debt held in foreign currencies.

The risks listed in the assessment include a lack of transparency in policy making and government institutions and Hungary’s national debt. “We think it unlikely that net general government debt would be lower than 60% of GDP by 2019,” the statement said.

The statement also said it is a problem that the central bank may be discouraged to fight inflation because it offers low interest rate swaps in two different programs, one designed to encourage banks to buy Hungarian bonds and the other meant to encourage banks to make loans. According to the S&P statement, MNB would lose money from these programs if interest rates rise, so the central bank might be discouraged from raising interest rates, even if inflation becomes a problem. S&P said inflationary pressures are likely to return by late next year.

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