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Standard and Poor's affirms Hungary rating; outlook still negative

Standard and Poor's Ratings Services on Wednesday affirmed Hungary's “BBB-/A-3” sovereign credit ratings, maintaining a negative outlook.

“The negative outlook reflects our opinion that key components of the government's plan to consolidate public finances do not improve the government's structural deficit and could harm Hungary's medium-term growth prospects,” S+P said.

S+P acknowledged the government's commitment to achieving the 2.9%-of-GDP deficit target for 2011, but said ad hoc, temporary taxes levied on the banking, telecommunications, energy and retail sectors to offset lost revenue from the introduction of a flat-rate personal income tax did little to address the structural deficit.

The taxes are to raise 1.4% of GDP in 2010-2012.

S+P was also critical of a government measure suspending payments to mandatory private pension funds from November until the end of 2011. The measure, to raise inflows by 0.2% of GDP in 2010 and by 1.3% in 2011, “could undermine the long-term sustainability of public finances--particularly if it were to become a permanent feature--and we consider it a regressive step for the quality of Hungary's public finances,” said S+P credit analyst Kai Stukenbrock.

The government expects the flat-rate personal income tax to boost labour force participation, but without job market and welfare reforms, the positive impact on economic growth and tax revenues could be “significantly muted”, S+P said.

Overall, the measures are likely to hamper economic growth by reducing banks' willingness to lend and dampening FDI levels, putting pressure on Hungary vulnerable external financing position.

S+P expressed concern that Hungary's general government deficit would start growing again when the sector levies expire at the end of 2012 and approach 6pc of GDP in 2014. State debt is seen rising to 79% of GDP in 2014 from 74% in 2010.

S+P said it would consider downgrading Hungary if it sees no credible perspective for a structural improvement in Hungary's public finances that would lead to a meaningful decline in public debt as a percentage of GDP over the medium term, if the political commitment to pursue policies that support economic growth weakens, or if there is external pressure or signs of problems in the financial sector.

Ratings could stabilize if the government “establishes what we regard as clear medium-term fiscal objectives that, in our view, begin to address some of the long standing impediments to economic growth and increase the prospects of a sustainable reduction of public debt,” S+P said. (MTI Econews)