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Fitch downgrades Hungary rating outlook to negative

Fitch Ratings on Friday said it revised the outlooks on Hungary’s long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the ratings at ‘BBB-’ and ‘BBB’, respectively.

Fitch also affirmed Hungary’s Short-term IDR at ‘F3’ and Country Ceiling at ‘A-’.

"The revision in Hungary’s Outlook to Negative reflects a sharp deterioration in the external growth and financing environment facing Hungary’s small, open and relatively heavily indebted economy," said Matteo Napolitano, Director in Fitch’s Sovereign Group. "Moreover, various fiscal policy measures and the scheme to allow the repayment of household foreign currency mortgages at below market exchange rates have dented foreign investor confidence, on which medium-term growth prospects depend," he added.

Hungary is particularly exposed to any deterioration in the economic and financial conditions in the eurozone, because of its open economy, mainly Western European-owned banking sector, relatively high levels of public and external debt and financing ratios, sizeable stock of portfolio investment and Swiss franc-denominated mortgage debt, Fitch said.

Fitch said it expects Hungary’s economy to grow just 0.5% in 2012, down sharply from its projection of 3.2% growth made in June 2011.

Hungary’s government "appears committed to fiscal consolidation", Fitch said. The agency projects a general government surplus of around 3.5% of GDP in 2011, helped by big one-off factors, such as the transfer of private pension fund assets to the state, but it projects a general government deficit of 3.3% of GDP for 2012, noting that the government’s 2.5% deficit target for that year is "challenging" because of "the weak growth outlook, the uncertain costing and implementation of some measures and potential reform fatigue".