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Fitch revises Hungary outlook to stable from negative

Fitch Ratings on Monday said it revised the outlook on Hungary's long-term foreign and local currency Issuer Default Ratings to stable from negative and affirmed the ratings at 'BBB-' and 'BBB', respectively.

The agency also affirmed Hungary's Short-term IDR at 'F3' and Country Ceiling at 'A-'.


"The revision in the Outlook to Stable reflects the fiscal policy targets and measures announced by the Hungarian government in its Convergence and Structural Reform Programmes in the spring that have increased confidence that the budget deficit will be reduced to below 3% of GDP by 2012 and the government debt ratio will be put on a sustained downwards path, easing downside risks to sovereign creditworthiness," said Ed Parker, Managing Director in Fitch's Sovereign Group.


The government's Structural Reform Programme for 2011-2014 lays down fiscal measures worth HUF 550 billion, or about 1.9% of GDP, in 2012 and HUF 902 billion, or 3% of GDP, by 2013, Fitch said. The programme reaffirms the government's commitment to budget deficit targets of 2.5% of GDP in 2012, 2.2% in 2013 and 1.5% by 2015, it added.


The measures fall predominantly on the spending side as the government plans to reduce public expenditure from 48.8% of GDP in 2010 to 42.5% in 2013, Fitch said.


Fitch noted that the transfer of private pension funds back into the public sector would divert annual social security revenues worth around 1.4% of GDP back to the general government, adding that this would also reduce private savings for future pension provision by a roughly similar amount.


"These measures would largely offset the impact of permanent cuts in personal income and corporation taxes worth around 4.5% of GDP by 2013, announced in the 2010 budget, which were only partly funded by temporary pension receipts and specific sector and banking taxes, Fitch said. "Nonetheless, Fitch sees significant implementation risks to the fiscal consolidation programme," it added.


Fitch forecasts general government debt to decline from 80.2% of GDP (well above the 'BBB' range median of 37.5%) to 75% at end-2011 and 71% by end-2013. The drop in 2011 will be helped by the transfer of private pension fund assets worth around 9% of GDP back to the government, although in effect around 4% of GDP will be used in taking on some state-owned enterprise debts and purchasing shares in oil refiner MOL, Fitch said.


"In terms of potential triggers for future rating actions, the successful implementation of the government's medium-term fiscal consolidation programme consistent with a significant and sustained reduction in the budget deficit and government debt-to-GDP ratio could lead to an upgrade. In addition, a return to robust GDP growth particularly in the context of significant structural reforms, a strong trade performance and declining external debt ratios could lead to positive rating action," Fitch said. "In contrast, material slippage against these fiscal targets and a failure to restore the public finances to a sustainable course could lead to negative rating action. Negative pressure on the rating could also emerge from anaemic growth, private sector capital outflows, increased problems in the banking sector or a significant shift in investor sentiment that adversely affected Hungary's public and external financing capacity," it added.