S+P revised its outlook for Hungary's sovereign rating to negative. It could lower Hungary's sovereign rating if government policies are unlikely to result in a meaningful decline in public debt as a percentage of GDP over the medium term or if the political commitment to pursue growth-supportive policies weakens.
Standard and Poor's on Friday said it revised its outlook for Hungary's sovereign rating to negative from stable because "key components of the government's plan to consolidate public finances could prove harmful to Hungary's medium-term growth prospects".
"The negative outlook reflects our opinion that key components of the government's plan to consolidate public finances could prove harmful to Hungary's medium-term growth prospects, reducing the government's ability to put the public finances onto a more sustainable footing," said S+P credit analyst Trevor Cullinan.
At the same time, S+P affirmed the long- and short-term 'BBB-/A-3' foreign and local currency sovereign credit ratings. The transfer and convertibility assessment on Hungary remains at 'A-'.
S+P acknowledged government measures that are likely to improve the sustainability of public finances, such as public sector wage cuts, and it said the government was likely to come close to the targeted 3.8pc-of-GDP general government deficit target. "Nevertheless, we estimate that the imposition of some of the government's other measures could have a potentially adverse impact on the medium-term macroeconomic outlook for Hungary," S+P said.
S+P singled out an extraordinary tax on financial sector companies expected to generate HUF 200bn -- 0.8pc of GDP -- in 2010 as a measure that will affect not only growth but "could impede the functioning of the financial system over the medium term by impairing the banking sector's ability to raise capital and therefore its ability to lend".
S+P said a EUR 20bn financial support package from the IMF and EU "has proven a strong policy anchor and has helped improve access and reduced funding costs of the Hungarian government in the capital markets", even though Hungary has not drawn on the facility since September 2009.
Talks between the government and delegations from the IMF and EU on the conditions for the next draw-down from the facility were suspended at the weekend. National Economy Minister Gyorgy Matolcsy said after the delegations left that the extraordinary bank levy was a point of contention at the talks, but revenue from the tax was necessary to meet the 2010 deficit target.
S+P said it could lower Hungary's sovereign rating "if, over the next year, we conclude that government policies are unlikely to result in a meaningful decline in public debt as a percentage of GDP over the medium term or if the political commitment to pursue growth-supportive policies weakens." Hungary's rating could be affirmed "if the government establishes clear medium-term fiscal objectives that, in our view, begin to address some of the longstanding impediments to economic growth and increase the prospects that the high public debt burden will begin to decline," S+P said.
MOODY'S: STRIKE ONE
Moody's decision to initiate this review was prompted by the increased uncertainty regarding Hungary's fiscal outlook and economic prospects. This uncertainty is the result of the recent breakdown of Hungary's talks with the IMF and EU which in turn led to a suspension in the next disbursement from the IMF/EU €20 billion loan program for Hungary.
In a related rating action, Moody's also placed Hungary's Baa1 foreign currency bank deposit ceiling on review for possible downgrade. This ceiling reflects the risk that the Hungarian government would freeze foreign currency deposits to conserve scarce foreign currency resources during a crisis. The outlook on Hungary's Aa2 country ceiling for foreign currency debt remains stable. This is generally the highest rating attainable by an issuer of foreign currency debt domiciled in the country.
Moody's also placed the Baa1 foreign currency government bond rating of the National Bank of Hungary on review for possible downgrade.
While Moody's acknowledged the Hungarian economy's macroeconomic and fiscal adjustments (as reflected in current account and primary budget surpluses in 2009), the rating agency believes that the country's economy remains vulnerable because of the high foreign-currency indebtedness of both its private and public sector. Consequently, market confidence in both the government's fiscal consolidation program and the value of its currency are considered very important.
“The failed talks between the IMF/EU and Hungary's government about the country's loan program - which represents a crucial policy anchor for Hungary - has increased uncertainty about the authorities' determination to restore fiscal sustainability in the near term,” says Dietmar Hornung, a Moody's vice president - senior credit officer and lead analyst for Hungary. By espousing fiscal deficits above those recommended by the IMF and EU, Moody's believes that the Hungarian government has increased the uncertainty over whether its debt affordability will stabilize within the next two to three years.
Moody's also says that the suspension of talks with the IMF/EU is clouding Hungary's economic growth prospects by exerting downward pressure on its currency and upward pressure on funding costs. The rating agency believes that the MNB may be forced to raise policy interest rates out of concern over the impact of exchange rate depreciation on the foreign debt-servicing costs of both public and private sector borrowers. For the MNB, this issue would likely outweigh concerns that higher interest rates might restrain economic growth.
In addition, Moody's says that the government's bank levy represents a further potential drag on economic activity as it could negatively affect banks' credit provisioning and the country's investment climate. The levy could also prompt foreign banks to scale back their Hungarian operations. (BBJ, MTI)