S&P affirms Hungary 'BBB' sovereign rating with stable outlook

Ratings

S&P Global Ratings affirmed Hungary's 'BBB' sovereign rating with a stable outlook at a scheduled review, according to a report by state news wire MTI.

"Hungary's open, competitive economy, generally solid growth performance, and strong external balance sheet support its credit quality. Persisting constraints, however, stem from weak checks and balances between government branches, a relatively high government debt burden, and moderate wealth levels," S&P said.

S&P noted that it expects Hungary's GDP to grow by "at least 6%" in 2021, underpinned by its "effective" vaccination rollout and reopening of the economy as well as expectations that the country will receive "the better part of its share" of Recovery and Resilience Facility (RRF) and 2021-2027 EU budget funding.

"That said, the deepening rift with the EU jeopardizes the timely disbursement of these funds," S&P added.

S&P noted that the European Commission had delayed an advance payment to Hungary from the RRF amid escalating tensions after an infringement procedure was launched against the country for legislation that codifies the rights of parents to take charge of their children's sexual education.

S&P acknowledged that the government can temporarily compensate for the delayed transfers by using "still-ample" cash reserves and said "we continue to believe that the remaining disbursements will not be affected and that tensions with the EU will ease after the April 2022 general election".

The agency put Hungary's general government deficit, relative to GDP, at 7.5% in 2021 and 5.9% in 2022. 

"We expect EU funds and net inward FDI will enable modest external deleveraging over the coming three years," it added, noting that the pipeline of new FDI "remains one of the strongest" in Central and Eastern Europe.

S&P said Hungary's gross state debt would decline to "about 75% of GDP" between 2021 and 2024 from over 80% in 2020, adding that it sees "no immediate funding pressure" in spite of the relatively heavy debt burden.

Hungary's rating could be upgraded if economic growth continues to outpace peers' without engendering overheating or external balances, and if public finances are consolidated more quickly than projected, S&P said.

Downside rating pressure could build if fiscal deficits remain elevated and Hungary's external position weakens beyond the April 2022 general election, S&P added.

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