S&P Downgrades Hungary to BBB-
S&P Global Ratings downgraded Hungary's sovereign rating to BBB- from BBB at a scheduled review on Friday, according to a report by state news wire MTI.
The outlook on the rating - one notch over the investment grade threshold - is stable.
The rating agency noted that the downgrade follows "a series of economic shocks" to Hungary in the context of the pandemic and the war in Ukraine which have "impaired the policy flexibility of fiscal and monetary authorities".
"We expect fiscal consolidation will be difficult given still-elevated energy costs, a rising interest bill, and a challenging economic outlook," S&P said.
S&P pointed to the timely availability of European Union funds, which remain suspended under the EU's rule of law conditionality mechanism, as a specific economic risk, but said its "baseline expectation" is for Hungary to reach an agreement with the EU, losing "no substantial part" of the funding.
"A significant delay or shortfall in EU funding would significantly affect our forecasts for economic growth, fiscal balances, and external metrics over the next four years," S&P added.
S&P acknowledged that risks to Hungary's energy supply have abated since the fall because of lower demand and a mild winter, but said another deterioration of European energy markets in 2023 could be more strongly felt in Hungary given its high dependence on Russian energy.
The agency said Hungary's economy would "narrowly avoid" a contraction in 2023 and put GDP growth at 0.3%, boosted by exports. It added that the country has continuously increased export capacities in manufacturing, in growth sectors such as EV production, too.
A "resilient" labor market, with high employment and strong wage growth, also supports the growth outlook for 2023, S&P said.
S&P expects Hungary's growth to converge close to 3% after 2023.
The agency acknowledged that some "unconventional measures" by the government have helped reduce Hungary's vulnerabilities, but said others "could hurt long-term growth performance". "We have yet to observe weaker net foreign direct investment...inflows because of past policy decisions," it added.
S&P expects a "meaningful reduction" in the inflation rate in the second half of 2023 and puts average annual inflation at 18.5%. It sees CPI falling into the central bank's 2%-4% tolerance band only at the end of 2024.
The agency said central bank measures, such as the introduction of short-term FX swaps and deposit facilities, an increased reserve requirement threshold for lenders, and providing FX liquidity to energy importers, have helped stabilize financial markets, contributed to improved monetary transmission and aided in stabilizing the exchange rate.
S&P puts the general government deficit at 4.2% of GDP in 2023. It sees state debt, relative to GDP, falling to 64.9%.
S&P said the stable outlook on the sovereign rating reflects its expectations that Hungary's economy will "avoid a substantial economic downturn" over the next two years and weather the indirect effects of the war in Ukraine, while fiscal deficits are gradually reduced.
A significant cut in Hungary's EU funding or energy supply constraints could put downward pressure on the sovereign rating. The rating could be upgraded if the fiscal and current-account deficits narrow more quickly than expected or the economy posts a stronger and earlier recovery, S&P said.
SUPPORT THE BUDAPEST BUSINESS JOURNAL
Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.