Moody’s Upgrades Hungarian Economy, Warns of Long-term Risks


With Moody’s upgrading the Hungarian economy, all three international market-leading rating agencies now register the country with the same sovereign debt rating and outlook for the first time in several years.

International rating agency Moody’s raised Hungary’s sovereign debt rating to “Baa2” from “Baa3” at its scheduled review on September 24. Moody’s also changed the outlook for the Hungarian sovereign rating from “positive” to “stable,” the former having been effective since September last year.

In the rationale for its decision, the rating agency cited as one of the main factors for the upgrade the strong growth rebound throughout the first half of this year, which also contributed to the stronger resilience of the Hungarian economy. Effective fiscal and monetary policies also supported this, Moody’s noted.

Moody’s expects Hungary’s potential GDP growth to be around an annual 3-4% over the next five years. The agency points out that due to the coronavirus epidemic, Hungary’s gross domestic product contracted by 5% last year, which is less than the European Union as a whole, where the average setback to the economic performance was 5.9% in 2020.

According to Moody’s forecast, the medium-term outlook of the Hungarian economy until 2025 is underpinned by high investment rates, which reflects Hungary’s attractiveness to foreign investors and the Hungarian government’s growth-friendly economic policy, including low corporate taxes and ongoing reductions in employers’ social security contributions.

The investment rate in the Hungarian economy was 27.6% of GDP last year, which is higher than the EU average of 22%, the rating agency points out in its analysis. Moody’s emphasized that none of the major investment projects - including capacity expansion projects in the automotive industry and greenfield projects - were canceled in Hungary last year.

Near Future

As for the near future, Moody’s calculates with a net positive inflow of foreign direct investment into the Hungarian economy corresponding to 0.3% of GDP during 2021-2025.

According to the credit rating agency, the extra room for maneuver resulting from stronger-than-expected economic growth this year will be largely used by the government; however, it believes that the budget deficit could be 6.5% of GDP instead of the officially targeted 7.5%.

Thanks to strong economic growth, the debt ratio may also start to decline in the coming years, shrinking by almost four percentage points to 76.7% by 2023.

Moody’s also points out that one of the long-standing risks related to the Hungarian debt rating is the relationship between the government and the EU, which has now culminated in the temporary suspension of the recovery fund’s resources and the possible suspension of subsidies for the 2021-27 cycle.

According to the agency, there will be an agreement sooner and later, and the temporary slip will have a minimum impact on the country’s growth and the budget.

Other long-term risks to Hungary, as Moody’s points out, include an aging population, possible difficulties in valuing supply chains, the need to improve innovation and productivity, and ensuring further catching-up.

Further Upgrades?

According to the credit rating agency, if fiscal discipline returns faster than planned, it could lead to a further upgrade in the future. In addition, the implementation of structural reforms and the National Bank of Hungary’s competitiveness reform proposals could positively affect the current rating.

On the other hand, a slower-than-expected reduction in the budget deficit or a slowdown in the debt ratio would justify a negative move, the rating agency warns.

Additional risks include a further deterioration of relations with the EU, a permanent suspension of aid, and the implementation of possible economic policy measures that would undermine growth, Moody’s said.

“It is surely a surprise that Moody’s upgraded Hungary,” said Gábor Regős, head of the macroeconomic department at research institute Századvég in a statement reacting to the upgrade. According to him, although a positive outlook had been in place for a year, given the pandemic situation, it could be expected that upgrading would only occur later, if at all.

With Moody’s latest move, all three international market-leading rating agencies register Hungary with the same sovereign debt rating and outlook for the first time in several years. Moody’s new “Baa2” rating for Hungary corresponds to “BBB” in the methodology of the other two major credit rating agencies, Fitch Ratings and Standard & Poor’s.

Upgraded Forecasts

Hungarian analysts and international institutions have continued upgrading their forecasts for the Hungarian economy. The latest to do so is Takarékbank, where head analyst Gergely Suppan said that the growth of the Hungarian economy could be as much as 8% this year, based on better-than-expected data in the third quarter.

This year, the driving force for growth is investment, and employment is already above pre-epidemic levels. Takarékbank now maintains its growth forecast for next year at 7%, with the possibility of further increases in the minimum wage and the skilled minimum wage. In the second half of this year, labor shortages may re-emerge, which could accelerate wage growth.

Due to the constraints in the first quarter and partly in the second quarter of this year, the base for growth in the first quarter of 2022 will still be low in some sectors. Therefore, robust growth can be expected in the coming quarters, supported by the recovery of the labor market and strong wage dynamics.

Numbers to Watch in the Coming Weeks

The Central Statistical Office (KSH) will publish the September inflation data today (October 8). On October 13, the second, more detailed reading of the August industrial production figures will be released. The next day, construction industry data for August will be out.

This article was first published in the Budapest Business Journal print issue of October 8, 2021.

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