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Good news for Hungary: Three out of three

November 4 finally brought the much-awaited third upgrade for Hungary: Moody’s Investors Service raised the country’s credit ratings back to investment grade. As a result of the move, Hungary’s debt might be reduced by about HUF 10 billion in the next 1-1.5 years. Not such good news from the past weeks, however, is that the latest industrial output data has, again, show a big setback.

Moody’s Investors Service upgraded Hungaryʼs long term issuer and senior unsecured government bond ratings by one notch to Baa3 from Ba1 at the beginning of November. The outlook on the rating is stable. 

According to a statement the ratings agency issued following the decision, among the key drivers for the upgrade was the fact that the government debt burden, which now benefits from a lower share of foreign currency denominated debt, would continue to gradually decline. Moody’s expects the debt-to-GDP ratio to drop to around 72% of GDP next year, from a peak of around 81% in 2011.

Moody’s also noted that structural economic improvements would help sustain positive growth rates of 2-2.5% in coming years, supporting economic strength. “Hungary’s economy has responded to a number of significant government policy measures, resulting in a consistent improvement in investment and consumption trends, which, together with economy-wide deleveraging and an improvement in cost competitiveness, will support economic performance in the coming years, with growth of around 2-2.5%,” it said.

Moody’s expects that Hungary’s economic growth will benefit from sizeable EU fund inflows over the next five years, equivalent to annual average inflows of around 3% of GDP, one of the highest in Central and Eastern Europe.

Sustained improvement

The third driver supporting the upgrade of Hungary’s government bond rating is the country’s reduced external vulnerability, which improves the resilience of Hungary’s Baa3 credit rating to future external shocks. Hungary’s external position has benefitted from persistent current account surpluses over the past few years, averaging 3% of GDP since 2013 compared to deficits of around 7% before 2008. This reflects a robust and sustained improvement in the trade balance and gains in export product diversification. Furthermore, Hungary no longer relies on external financing as its capital account benefits from the growing absorption of EU funds such that the combined current and capital account surplus reached around 10% of GDP in the last quarter of 2015. Moody’s expects Hungary’s external vulnerability to continue to decline as current account surpluses reduce the country’s large negative net international investment position.

The stable outlook on Hungary’s Baa3 rating reflects the balanced risks to the credit rating over the coming years. Moody’s expects that the greater predictability in policy making seen in the last couple of years will be sustained, resulting in a more stable, growth-friendly policy environment in Hungary than in the past. “At the same time, and while we expect some further improvements in the country’s key fiscal and external metrics, in some areas such as the public sector debt burden, the country will continue to lag its Baa-rated peers,” Moody’s noted.

The very fact that the country has been restored to the investment grade category by all three agencies could mean the cost of debt financing may decrease by some HUF 10 billion in the central budget in the next 12 to 18 months, economy minister Mihály Varga said at a press conference a day after Moody’s’ decision.

The latest upgrade might also trigger increased attention from international investors in Hungarian assets, and issuing FX-denominated bonds might therefore be a good opportunity for the government to ensure cheaper financing of the state debt. But it seems that is not on the agenda, at least for the time being. When asked whether the government is preparing to issue FX bonds, Varga said that “the fundamental intention remains the reduction of the sovereign debt and the raising of the percentage of forint debts”, making it clear that there are no plans for the issuance of foreign currency bonds in the near future. However, he noted that in the improving yield environment there is scope for improving the structure of the foreign currency debt through offerings with “terms and conditions that are more advantageous than at present”.

While international credit rating institutions admit Hungary’s improving performance on the macroeconomic level, some disappointing data has come to light recently. Poor figures show that the Hungarian industry is not back to its feet yet, as the volume of industrial production decreased by 3% month-on-month in September (following an upturn of 11% in August), and had decreased 3.7% on a year-on-year basis.

Negative impact

First estimate data released by the Central Statistical Office also shows that, looking at the first nine months of the year, industrial production is only 1.5% higher than it was in the same period of 2015. Industrial performance in the third quarter of the year was also rather weak, which will have a negative impact on this year’s GDP growth. According to economic news portal, the consensus among analysts it canvased is that the “contribution” of the sector to Q3 GDP growth will be between -0.3 and -0.5 of a percentage point, and its contribution to full-year GDP could be about zero.

The main reason for this weak performance is most likely the vehicle manufacturing sector, as this was the case in previous months. This year, there are no large-scale investments in the sector that could boost capacity, so the weaker output of the industry has been predictable. The automotive sector greatly influences the performance of the entire industrial sector, but because it is a low value-added sector, its contribution to the whole GDP is somewhat smaller. However, detailed industrial performance figures are yet to be published for September.

Numbers to watch in the coming weeks

The reasons behind the poor September performance of Hungary’s industry will come to light on November 14, together with agricultural producer prices. One day later, we will find out how industrial performance affected the GDP, as the Central Statistics Office will publish GDP figures for the third quarter. Construction data for September will also be released on November 15. Earnings for the January-September period will come out on November 22.