S&P upgrade surprises market, investment seen rising

Standard & Poorʼs Global Ratings said Friday it has raised its long and short-term foreign and local currency sovereign credit ratings on Hungary to ʼBBB-/A-3ʼ from ʼBB+/Bʼ, putting the country back in investment grade, Hungarian news agency MTI reported late Friday.

The rating announcement came as a surprise as market players and analysts did not expect an upgrade, but a shift in outlook to positive from stable at best, CIB Bank Hungary said in a flash report. An immediate forint appreciation followed, with new levels maintained at market opening Monday morning at close to EUR/HUF 308. Last Friday the FX market hovered mostly at 309-309.50, even with a brief weakening to above 310 in late trading, CIB analyst Sándor Jobbágy noted in the CIB flash. Today’s trading and possibly even the coming days should also deliver ongoing improvement in other asset classes (government bonds, CDSs, equity), Jobbágy added.

After S&P downgraded the Hungarian economy at the end of 2011, due to what it claimed were unpredictable economic policies and restructuring of the management of the National Bank of Hungary (MNB) it said could affect the independence of the financial institution, S&P attributed its latest upgrade decision to the decreasing vulnerability of the economy, improving debt figures and the potential growth outlook, a flash published by K&H Bank Hungary noted.

“The step made by S&P is more than a simple upgrade, as for now Hungary has been placed above the junk category by two big credit agencies, which means it is recommended to invest here,” K&H chief analyst Dávid Németh commented, referring to the upgrade made earlier this year by Fitch Ratings. “Additionally, the third big credit agency Moody’s could possibly upgrade Hungary as well at its November review,” the professional added.

Many market players only decide to invest in a country if at least two credit agencies decide to offer a country for investments, therefore the upgrade is significant, the K&H flash noted. More investors could consequently arrive soon on the Hungarian market, purchasing Hungarian state bonds for the long term and increasing the chances for rising yields not only in the short term, but also in the middle and long term, the K&H flash added, noting that this could stabilize the Hungarian state bond market.

The upgrade is also expected to positively affect the Hungarian forint, with predicted growing demand from abroad potentially strengthening the currency. Németh said he expects the euro-forint exchange rate to fall to around HUF 300-305.

However, as no statistics are known about the possible purchasing power of foreign insurance providers and pension funds with conservative investment policies, it is not yet known how the market will be affected in the short and middle term now that Hungary has received two recent upgrades, Equilor analyst Mónika Kiss said in a blog entry following the upgrade.

The current market environment favors European markets in terms of developing market investments, Kiss wrote, noting that the monetary easing of the European Central Bank (ECB) can be felt directly on the markets, which requires foreign investors to look for higher-risk investments, a factor eventually boosting interest in the CEE region. Although the U.S. Federal Reserve is expected to start raising its interest rate gradually and carefully, ECB dominance is foreseen for the coming months, according to Kiss.

Kiss added that the Hungarian central bank will now be left with more space to maneuver at its rate-setting meeting scheduled for tomorrow (Tuesday). The MNB may be able to orient financial institutions towards purchasing Hungarian state bonds, she noted. As the market was expecting another upgrade only in November, and not now, unexpected decisions could be made on the market, added Kiss.

“Everything is set for another purchasing wave, from which liquid Hungarian state bonds and stocks could emerge as winners in the first place,” Kiss speculated about the possible effects of the surprising upgrade. She added that the first blue chips to react on the upgrade could be OTP and Magyar Telekom, followed by Richter and MOL on decreasing risk premiums. The sentiment may also boost IPOs, according to Kiss.

Hungary’s Minister for National Economy Mihály Varga welcomed the decision, calling it evidence of the success of the governmentʼs restructuring of the Hungarian economy, Hungarian news agency MTI reported late Friday.

“Hungaryʼs economic performance and market assessment are years ahead of the rating agencies: Hungaryʼs risk premium and yields on government securities are at nearly the same levels as countries in the investment grade,” Varga said in a statement issued by his ministry. A return to investment grade “has been timely for years,” he added. “The governmentʼs goal is not just to ensure the sustainability of favorable trends, but to achieve further improvements in economic policy,” the news agency reported Varga as saying.