Moody's Investors Service has downgraded Hungary's government bond ratings and the country's foreign currency bank deposit ceiling to Baa1 from A3; the outlook is negative.
The actions reflect the impact of the current economic crisis on the Hungarian government's financial strength.
“When the global economic crisis set in, the Hungarian economy was already in a weak position relative to its Central European peers,” explained Dietmar Hornung, a Vice President-Senior Analyst in Moody's Sovereign Risk Group. “Given its sizeable external financing needs, Hungary is particularly exposed to the current environment.”
Moody's believes Hungary is hampered by its limited monetary and fiscal policy maneuver, due to exchange rate weakness and adversely affected debt metrics, respectively.
“Should the Hungarian forint considerably depreciate further, the private sector would be exposed to significant balance sheet problems, as both households and corporates have borrowed extensively in Swiss francs and euros,” said Hornung. “Moreover, in such a depreciation scenario, the quality of bank portfolios is set to decline.”
Moody's also recognizes that Hungary is dependent on external support to meet its financing needs. The IMF, EU and World Bank granted Hungary a €20 billion support package that eased concerns that the country would experience difficulties in meeting its foreign currency financing requirements.
Going forward, Moody's will be closely monitoring whether the fiscal performance can be stabilized as envisioned in the IMF-led economic adjustment program.
In related actions, Moody's also downgraded Hungary's foreign currency bond ceiling to Aa2 from Aa1; the outlook is stable. Moody's has also downgraded the foreign currency deposit ceiling to Baa1 from A3; the outlook is negative. The local currency bond ceiling of Aaa with stable outlook remains unchanged.
The last rating action was implemented on November 7, 2008, when Moody's downgraded Hungary's local and foreign currency government bond ratings and the country ceiling for foreign currency bank deposits to A3 from A2 and assigned negative outlooks. (press release)