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Scope affirms Hungary’s credit rating of BBB

Ratings

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Credit rating agency Scope has changed the outlook on Hungaryʼs BBB sovereign rating from "stable" to "positive." At the same time, Scope has affirmed Hungaryʼs BBB long-term and senior unsecured local and foreign currency ratings, along with the short-term issuer rating of S-2 in both local and foreign currency.

The outlook on the long-term issuer and senior unsecured debt ratings has been set to "positive." The outlook on the short-term issuer rating is "stable," Scope Ratings announced in a press release sent to the Budapest Business Journal.

According to the press release, the drivers for todayʼs rating action reflect:

i) the sovereign’s robust economic performance and outlook, along with an ongoing pickup in the absorption of European Union structural funds;

ii) significant progress achieved in reducing external imbalances, driven by sustained current account surpluses and deleveraging in the private sector;

iii) the consolidation of public finances accompanied by a marked improvement in public debt structure and funding sources; and

iv) the stabilizing and strengthening financial sector.

The positive outlook indicates Scope’s assessment that the upside potential from better-than-expected economic and fiscal outcomes outweighs the challenges stemming from a still high public debt burden, the country’s low non-price competitiveness and labor shortages, as well as weakening institutional credibility and economic policy predictability.

Despite a continued downward trajectory since 2011, Hungary’s public debt of 73% of GDP in 2017 remains relatively high compared to that of peers and well above the Maastricht threshold of 60%, notes the assessment.

Scope’s public debt sustainability analysis foresees only a gradual decrease in the debt-to-GDP ratio to slightly below 70% over the medium term, significantly above that of peers. In addition, relatively weak non-price competitiveness, reflected in subdued productivity growth and labor shortages, represent an important credit weakness in Hungary’s long-term economic growth prospects.

Finally, the current government’s conflicted relationship with EU institutions and its consolidation of political power at the expense of independent institutions, which especially affects the central bank and judiciary, have increased the unpredictability of economic policy, the regulatory system, and the ability to conduct business in a transparent and predictable environment, notes Scope.

The positive outlook reflects Scope’s view that these developments may continue after the expected re-election of the current government on April 8, but will not materially worsen the economic and fiscal outlook for Hungary.

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