Fitch Ratings has downgraded Hungary's long-term foreign currency issuer default rating to "BBB-" from "BBB", and its long-term local currency rating to "BBB" from "BBB+".
The outlooks on the long-term ratings remain negative, Fitch said in a release on Thursday.
The agency has also downgraded the country ceiling to "A-" from "A", and affirmed the short-term foreign currency rating at "F3".
"The downgrade of Hungary's ratings reflects a material worsening in the underlying medium-term budget position, while relatively high levels of public, external and domestic foreign-currency bank debt leave the country vulnerable to negative shocks," said Ed Parker, Head of Emerging Europe in Fitch's Sovereigns team.
Fitch expects Hungary's fiscal deficit to narrow to 3.8% of GDP in 2010 — in line with the government target — but the ratings company also said the new Fidesz government's fiscal plans "go in the wrong direction for further fiscal consolidation" and could worsen the underlying medium-term budget outlook by about four percentage points of GDP in 2011-2012.
Although Hungary's headline fiscal deficit is set to narrow to 2.9% of GDP in 2011, it is "flattened" by extra revenue projected at 3.2% of GDP from a decision to bring assets in the mandatory private pension pillar to the state pillar, Fitch said. The cost of permanent personal income and corporate tax cuts will come to 2.5% of GDP in 2011 and rise to 5% of GDP by 2013, it added. At the same time, and extraordinary bank levy equivalent to 0.7% of GDP and crisis taxes on the telecommunications, retail and energy sectors of 0.6% of GDP are set to ease in 2012-2014, Fitch said.
Fitch said the government's assumption of 5% GDP growth in 2013 was "optimistic".
"The reversal of pension reforms and lack of a coherent medium-term fiscal strategy undermines confidence in the long-term sustainability of the public finances," Fitch said.
Fitch noted Hungary's gross government debt is about 80% of GDP, compared with the ten-year "BBB" median of 35%. The government has refinancing needs of about 15% of GDP in 2011 and 2012, it added.
Fitch could downgrade Hungary's rating if it fails to implement credible medium-term fiscal consolidation measures that restore the public finances to a sustainable course, if the country's risk premium rises significantly and the economy fails to recover, if capital inflows slow sharply, or if there is a drop in rollover rates on maturing external debt and/or the development of difficulties at foreign parent banks or the local banking system. "A return to robust GDP growth and implementation of fiscal consolidation measures that returns the public finances to a sustainable course could lead to positive rating action," Fitch added. (MTI-ECONEWS)