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S&P changes outlook on Hungary rating to ʼpositiveʼ from ʼstableʼ

S&P Global Ratings on Friday changed the outlook on Hungaryʼs "BBB" sovereign rating to "positive" from "stable", state news wire MTI reports.

"The outlook revision reflects Hungaryʼs strong economic growth outlook with macroeconomic imbalances remaining contained," S&P said, noting that the countryʼs economy is growing at one of the fastest clips in the European Union.

"The positive outlook also reflects our assumption that the floating exchange rate and still-low labor costs should support Hungaryʼs external competitiveness, containing the erosion of the current account position and preventing accelerated releveraging," S&P added.

Despite some signs of overheating, including in the tight labor market, risks to external competitiveness "appear contained in the near term", S&P said. It projected GDP growth would slow but "remain strong" at 3.5% in 2020, "absent an external shock".

S&P acknowledged that Hungaryʼs state debt level remains among the highest in the region, but said "solid economic growth, coupled with somewhat tighter fiscal policy" should support its decline.

S&P said Hungaryʼs ratings are supported by its "resilient export-driven economy, strong external profile, low private-sector debt, and the flexible exchange rate regime", while it identified "relatively weak checks and balances between government branches, moderate wealth levels, and high, albeit declining, public debt" as key constraints on the ratings.

S&P said "unconventional" government policies, "aided by a favorable external environment", had helped reduce the vulnerabilities of Hungaryʼs open economy. But it added that other government measures, such as sectoral taxes that "have disproportionately fallen upon foreign investors" could be detrimental to long-term growth performance.

"We could raise our ratings on Hungary within the next 24 months if the countryʼs economic performance continues to be stronger and more balanced than peersʼ, further lifting the countryʼs income levels. We could also raise the ratings if budget deficits narrow substantially during the forecast period," S&P said.

The outlook could be revised to stable if Hungaryʼs economy slows more than expected, for internal or external reasons; if a decline in external competitiveness causes the current-account balance to deteriorate; or if fiscal weakness causes state debt relative to GDP to rise, S&P added.