Fitch Affirms Hungary’s Rating in Upbeat, if Cautious, Review


Arvind Ramakrishnan

Fitch, the U.S. ratings agency, affirmed Hungary’s long-term, foreign-currency debt rating at “BBB” with a “stable” outlook in its latest review on the country at the end of January. The agency said the assessment “reflects the Hungarian economy’s strong structural indicators relative to peers and record of stable growth fueled by investment.”

However, this has to be balanced against “high public debt, a record of unorthodox fiscal and monetary policy moves, and a worsening of governance indicators in recent years,” the report cautions.

Nonetheless, the outlook is justified by projected sustainable economic growth following on from a stable recovery from the pandemic, plus a fiscal consolidation path that will result from an expected stabilization of the public debt ratio in the coming years, the agency argues.

Fitch estimates economic growth last year at 6.5%, based on strong private consumption and investment. (This is slightly below the latest government estimates: Minister of Finance Mihály Varga was reported in local media of speaking in early February of a 6.8-6.9% expansion.)

The agency points to supply chain shortages hurting production in the automotive sector, which accounts for about 5% of GDP and 14.5% of goods exports, but reasoned these bottlenecks are expected to ease in the second half of this year. Combined with the impact of the absorption of European Union structural funds under the 2014-20 cycle, Fitch estimates this will result in real GDP growth averaging 4.4% in 2022-23.

This positive outlook also assumes that what the agency terms “Next Generation EU (NGEU) funds” will kick in from the second half of this year, although it acknowledges that disbursement of these funds “hinges on legal disputes being resolved” between Hungary and the Union.

These disputes, which include Brussels’ concerns over the rule of law, corruption surrounding public procurement and media freedom, have already resulted in delays in payments to Hungary related to the European Commission’s Recovery and Resilience Facility (RRF) created to offset the effects of the COVID pandemic on member countries’ economies.

Unlocking Funds

However, Fitch appears confident that, following the general election in April, Hungary will “seek to negotiate with the European Commission (EC) over rule-of-law disputes to unlock the first tranche of RRF funds, equivalent to HUF 300 billion, (0.6% of projected 2022 GDP)”. (See box)

Furthermore, the agency’s forecast for this year also estimates a stimulus of up to 1.1 percentage points of GDP to household consumption as a result of refunds of personal income tax (PIT) payments to families with children.

Along with this positive scenario, though, Fitch warns that overheating risks are “becoming more evident,” with inflation averaging 5.1% in 2021, well above the 2-4% tolerance band of the National Bank of Hungary (MNB).

“High commodity and services prices pose continued upside risks to inflation, although the strengthening of the forint since the start of the year (aided by tight monetary policy domestically) will mitigate risks to some extent. Core inflation is also high, reaching 6.4% in December 2021. Fitch expects inflation to peak in 2022 at 5.8% (annual average) before dropping to 3% in 2023,” the review continues.

Among the anti-inflationary measures, Fitch points to the MNB phasing out its quantitative easing program and raising the base rate by a cumulative 230 basis points to 2.9%, along with the one-week collateralized lending rate by 305 basis points, both since June 2021.

Moreover, the bank looks set to tighten policy further, given rising inflation concerns this year. In spite of such moves, the government last December “announced a six-month freeze on mortgage interest rates, raising concerns over policy coordination and predictability,” the review notes.

Government Deficit

Into this mix, the review calls attention to the general government deficit, which it estimates at 7.9% of GDP in 2021, compared to the revised government target 7.5%, a reflection of the impact of personal income tax refunds to households and pandemic-related fiscal measures.

Fitch envisages the deficit falling to 5% in 2022, slightly above the revised budgetary target of 4.9%, warning that some fiscal slippage is possible from higher indexation for pensions in 2022, should inflation turn out higher than expected.

Referring to the forthcoming elections, the review notes that the governing Fidesz party “appears set to face a notable challenge to its 12-year stint in power.” However, while it also points out that “the disparate opposition, including the far-right Jobbik party, is backing a common opposition candidate who has opposed the government’s loose fiscal policy and favors closer ties with the EU”, it argues that “the stability of a putative opposition-led coalition is unclear.”

The agency’s projections are largely in line with other independent assessments: for example both Raiffeisen Bank and Hungary’s Equilor brokerage forecast 4.5% GDP growth in Hungary this year.

In contrast, Márton Gyöngyösi, a Jobbik member of the European Parliament, was disdainful of Fitch’s description of his party as “far right.”

“I think they would do better updating themselves and getting up-to-date information before they rate and before [they] mislead the international public,” he told the Budapest Business Journal, insisting that Jobbik had rejected former radical policies and branded itself as a “center-right, people’s party” for a number of years, thereby being accepted in the opposition alliance.

Ramakrishnan: ‘Absolutely in Hungary’s Interest to get These Funds.’

Arvind Ramakrishnan, primary sovereign analyst for the Visegrád countries at Fitch Ratings, argued in an online discussion just two days before publishing the review that “it is absolutely in Hungary’s interest to get these funds. They are a substantial source of investment,” he said in response to a question from the BBJ.

Noting that in the third quarter of last year, Hungary issued “over USD 4.5 bln worth of foreign exchange denominated debt specifically because they had to make alternative arrangements because the RRF funds were being delayed,” he said that this indicates “the importance with which they [the Hungarian authorities] take these funds into account in planning for growth estimates.”

As concerns the dispute with the EU, Ramakrishnan said the problems involving Hungary are at a “slightly lesser scale” than they are for Poland, while the country faces a general election in April which he deemed “an important inflection point.”

“If Orbán loses the election, and we don’t have a view on that either way, and if the opposition comes into power, we can expect a kind of reset in relations between Hungary and the European Union,” Ramakrishnan said.

But if Orbán regains power, Ramakrishnan remains optimistic for a compromise, arguing “He [Orbán] will have made his point with regard to his stance against the European Commission in the run up to the elections, and there will be scope for compromise, so that Hungary is able to unlock at least the first tranche of 13% of these funds in the second half of this year.”

This article was first published in the Budapest Business Journal print issue of February 11, 2022.

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