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S&P upgrades Hungary to ’BBB’; outlook ’stable’

Standard & Poor’s Global Ratings, one of the three big ratings agencies, has upgraded Hungary’s sovereign rating to "BBB," two notches over the investment grade threshold, with a "stable" outlook, state news wire MTI reported late Friday evening. 

Standard & Poor’s raised its long and short-term foreign and local currency sovereign credit ratings on Hungary from "BBB-/A-3" to "BBB/A-2."

"The upgrade reflects Hungary’s sound growth prospects, supported by high private savings and real wage gains sustaining domestic demand, as well as the ongoing expansion of export capacity in the automotive and services sectors," S&P said in its justification for the decision. "While we expect growth to slow toward 2% by 2021, we think Hungary’s small open economy will be able to weather a period of weaker external demand, as well as the expected decline in EU funding," it added.

"The ratings are supported by Hungary’s resilient export-driven economy, strong external profile, low private-sector debt, and the flexible exchange rate regime. Relatively weak checks and balances between government branches, moderate wealth levels, and high public debt are key constraints on the ratings," S&P noted.

Hungary’s net external debt had fallen to under 10% of GDP in 2018, from 55% in 2010. Strong domestic demand, supported by wage growth, will likely thin current account surpluses to about 1% of GDP, noted the rating agency.

S&P said budgetary slippages similar to those in 2010-2011 are "unlikely," but added that the governmentʼs plans to reduce the general government deficit to 0.5% of GDP by 2020 are "optimistic." It warned that the chance to "put public debt on a sharp downward trend offered by the current cyclical upturn might be missed," leaving public debt net of liquid assets elevated at above 60% of GDP through 2020.

The agency acknowledged authoritiesʼ measures which have reduced the share of Hungaryʼs FX debt to around 20%, from over 60% in 2010. It also noted a reduction in non-residentsʼ holdings of central government debt to 36% at the beginning of 2018, from around 60% a few years ago.

Hungarian banks "appear to be well capitalized and profitable," S&P observed, adding that it considers banks’ renewed appetite to lend and stronger financial performance as a sign that the monetary and credit transmission mechanism to the real economy is largely restored.

Downside risks

S&P said the stable outlook "balances risks to Hungaryʼs competitiveness from an overheating labor market against prospects of further economic convergence with wealthier trading partners."

Among the factors that could lead to a positive rating action in the coming 24 months, S&P listed a stronger and more balanced economic performance than peers and a faster than expected decline in net public and external debt.

"We could take a negative rating action over the coming 24 months in the event of a significant external shock to Hungaryʼs open economy or an unexpected deterioration in external financing, including a suspension of EU transfers, or recurring weakness in Hungaryʼs public finances that fueled public debt," the agency added.

S&P noted that some "unconventional policies" employed under the government of Prime Minister Viktor Orbán had, "aided by a favorable external environment," helped reduce the external vulnerabilities of Hungaryʼs open economy.

"Other adopted measures could, however, be detrimental to long-term growth performance, by reducing competition in Hungaryʼs product markets, including via the introduction of sectoral taxes that have disproportionately fallen upon foreign investors," it added.

S&P noted a rapid rise in home prices in Hungary, especially in Budapest, since 2015, but said it views financial stability risks emanating from a sharp correction in the real estate market as "contained."

MNB, Varga: upgrade ‘deserved’ and ‘timely’

The National Bank of Hungary (MNB) welcomed the upgrade in a statement posted on its website and noted that S&P was the first of the big three ratings agencies to raise the sovereign rating to two notches over the investment grade threshold.

"Hungary deserved the latest upgrade, which is supported by the improvement of a broad range of macroeconomic indicators," the central bank said, adding that it "trusts that the rest of the ratings agencies will acknowledge the sustainable improvement in the fundamentals of the Hungarian economy."

Fellow ratings agencies Moodyʼs and Fitch both assign Hungary the lowest investment grade rating. Moodyʼs has a "stable" outlook on the rating, but Fitchʼs outlook is "positive," noted MTI.

On Monday, MTI cited Finance Minister Mihály Varga as saying that S&Pʼs decision to bump Hungaryʼs sovereign rating up a notch was "rather timely." Varga noted that the market had already priced in a significant improvement in Hungaryʼs fundamentals.

Varga asserted that a higher rating than "BBB" "would be justified."