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Hungary’s rating supported by economic, institutional strength

Hungary's Baa1 government bond rating is supported by high economic and institutional strength, but is constrained by low government financial strength and a medium to low susceptibility to event risk, says Moody's Investors Service said in a fresh sovereign credit report on Hungary.

Moody's noted that Hungary has been particularly exposed to the global economic crisis due to its sizeable external financing needs and its investment- and export-led growth model.

Moody's rating outlook for Hungary remains negative, but could be changed to stable if the Hungarian authorities continue to push for fiscal consolidation and widening of structural reforms. These objectives would, respectively, stabilize the debt metrics compatible with a high Baa rating and restore Hungarian competitiveness, so that the economy will be able to participate in a future pick-up in global economic activity. Moody's will monitor events and take appropriate action as and when

necessary, the ratings company said.

“Hungary's economic strength is high, reflecting the country's relatively wealthy population and economic diversification,” said Dietmar Hornung, a vice president-senior analyst in Moody's Sovereign Risk Group. "Although income convergence to the EU average has come to a halt recently, the overall picture over the past two decades remains favorable.”

Outside the Baltic countries, Hungary is the EU economy that has been most affected by the crisis, Moody's said. “However, recent survey data and high-frequency indicators point to gradually improving dynamics, particularly in manufacturing output and exports,” said Hornung. “Inflation is also set to decline, as the one-off effect due to the increase in VAT phases out and the negative output gap is expected to offset upside risks from FX volatility and a potential rise in commodity prices.”

Hungary's institutional strength is also high, reflecting the country's standardization of governing principles via its EU accession process and rule of law and transparency ratings akin to more advanced industrial countries in the region, Moody's said. WIndeed, the 'acquis communautaire' served as an effective catalyst to facilitate a systematic overhaul of the country's institutions. The legal reforms encouraged by EU membership are a reliable basis for increasing the confidence of investors and market participants,” Hornung said.

However, Moody's has assessed Hungary's government financial strength as low, as many years of deficit spending resulted in high debt as well as significant external vulnerabilities. Indeed, after a failed government bond auction in October 2008, the IMF, EU and World Bank stepped in to grant a support package worth €20 billion. The IMF recently announced an agreement to extend the program until October 2010.

Hungary's susceptibility to event risk is medium to low, reflecting intermittent and intense pressures on the currency, government refinancing risks and contingent liabilities that arise from the banking system, which Moody's assesses as one of the more fragile in the Central and Eastern European region. (MTI – Econews)