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Hungary a “natural candidate” for credit upgrade

Hungary's fiscal and external position is so strong that it is a “natural candidate” for a credit rating upgrade, a major City-based investment banking group said.

In its Global Economic Weekly publication released to investors, Bank of America-Merrill Lynch (BoA-ML) said it sees an upgrade by ratings agencies possible as soon as there are signs of a more tangible economic recovery and “the political/policy outlook clarifies”.

In a research note comparing recent fiscal performances of Hungary and Poland, it says that fiscal trends - the major driver of the growth differential last year - have diverged sharply between the two countries. Poland's headline fiscal deficit under the ESA95 standard is likely to widen to 6.3%-6.6% of GDP in 2009-2010 from 3.6% in 2008 as a result of the cyclical revenue loss and a fiscal stimulus worth some 1.8% of GDP. The latter helped to push the structural fiscal deficit to 6.5%-7.5% of GDP, which will likely translate to a structural primary fiscal balance of minus 4.5%c this year.

Meanwhile, Hungary – as a part of medium-term policy adjustment, enhanced by the IMF program – has engineered a major pro-cyclical fiscal tightening worth around 10% of GDP over the past four years - of which 4.5% of GDP in 2009 –, one of the largest fiscal adjustments in the history of Emerging Markets. This is projected to push the structural fiscal balance into a surplus this year, “implying structural primary surplus in excess of 5% of GDP on our calculations”.

A chart attached to the report shows that the bank expects a 5.3% of GDP structural primary surplus this year in Hungary.

Hungary's strong underlying fiscal position “leads us to believe that Hungary will be able to meet all nominal convergence criteria by 2011-2012 and adopt the euro in 2014”. Whether or not it takes the opportunity will ultimately be a political call made in 2010, as to adopt the euro in January 2014 Hungary would have to enter the ERM-II by Q1 2011, BoA-ML said. (MTI – Econews)