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Moody's annual report on Hungary gives negative outlook

In its annual report on Hungary, Moody's Investors Service says the country's investment-grade ratings reflect its advanced economic and financial integration with the European Union and its solid record of public debt management, Reuters reported on Monday.

Moody's released the following statement on the report, Hungary: 2006 Credit Analysis: "Hungary's AA1 foreign currency country ceiling is based on the foreign currency government bond rating of A1 and a very low risk of a payments moratorium in the event of a government bond default. Going forward, the government faces a major challenge on the fiscal and structural reform fronts, specifically, health care and education reform.”
"Interest rates have recently been raised after continued fiscal deterioration, speculative attacks on the currency, and the introduction of a government fiscal reform package that was judged to rest too much on raising taxes," said Moody's Vice President Jonathan Schiffer, author of the report.
Hungary's new Socialist-led government is unlikely to implement any fiscal reforms other than tax increases before local government elections in October, the report said. It has long been the medium-term plan of the Socialist Party to enact reforms and expenditure cuts in education and local administration; however, it is probable that such structural reforms will not occur until 2007, if at all.
The rating outlook is negative largely because of continued uncertainty concerning the government's commitment to fiscal tightening, which increases potential currency vulnerability and, with it, the possibility of deterioration in debt ratios and sovereign creditworthiness, Schiffer said.
The rating agency noted that the report is a yearly update to the markets and is not a rating action. Hungary has a long-term foreign currency rating of A1 by Moody's, and BBB+ by both Standard and Poor's and by Fitch Ratings.