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Half-way out of the junk heap

While the upgrade by the Fitch Ratings agency was cheering news, Hungary still needs at least one more positive endorsement from a big agency, and current figures may mean that more upgrades are not forthcoming.

Volume index of investment in Hungary. Corresponding period of previous year equals 100. (Source: Central Statistical Office)

Hungary is now out of “junk status” at one of the large credit rating institutions. Fitch Ratings finally upgraded the country to investment grade on May 20, changing Hungary’s rating to BBB- with a stable outlook. 

Prior to the action, analysts had been split: While some were positive about an upgrade, others said the weak quarterly GDP data and some political uncertainties around foundations operated by the National Bank of Hungary might make Fitch further delay its decision.

In its rationale, Fitch wrote that the combination of high current account surpluses, high European Union (EU) fund inflows, banks’ external deleveraging, the self-financing program and foreign currency mortgage conversion have contributed to a sharp improvement in Hungary’s external balance sheet and reduction in vulnerability. It also mentioned the sharp reduction in net external debt, down from 73% of GDP in 2012 to 43% of GDP in the third quarter of 2015.

Fitch uses its own methodology for calculating net external debt which differs from that which the Hungarian central bank uses.

Among the factors of medium importance that led to the decision, Fitch lists the government’s tighter fiscal policy, which, as the ratings agency says, has been consistent with a gradual decline in government debt from a high level.

The agency forecasts that debt will slowly decline in the medium-term. The situation of the banking sector has improved, the rating institution noted.

As an assumption, for its medium-term government debt projections, Fitch assumes the government will maintain the budget deficit at around 2% of GDP, with real GDP growth at 2%, some depreciation in the exchange rate and a gradual recovery in prices towards the 3% target. Government debt will slowly decline in the medium-term, to 67% of GDP by 2022.

Surprising timing

If another rating agency upgraded Hungary, savings due to the lowering yields could reach HUF 40-60 billion in the coming 1-1.5 years, Hungary’s Economy Minister Mihály Varga said right after Fitch’s action. The minister also said that the upgrade is a result of economic reforms the government implemented in 2010. He added that the government expects the two other major credit rating agencies to take similar action to Fitch.

Although Hungary’s upgrade to investment grade has been in the pipeline for months, the decision was a positive surprise, given a series of reports that seemed to reduce the chances of an upgrade, according to Eszter Gárgyán, a Budapest-based analyst at Citigroup. She said Moody’s Investment Services might be the next to upgrade Hungary this year, followed by Standard & Poor’s next year.

Others were not that surprised though: Raiffeisen Bank’s chief analyst Zoltán Török said the upgrade confirms efforts to stabilize the economy in the past four-to-five years. He added that a fiscal loosening this year and next was “not too serious” and the effect would be balanced, in part, by policy measures boosting demand and contributing to economic growth.

Easing cycle ends

The upgrade was not the only hot topic for the past fortnight: At its latest rate-setting meeting, the Monetary Policy Council of the National Bank of Hungary sent the key rate to another historic low mark when deciding to further cut it by 15 basis points to 0.9%. In a statement released after the meeting the council said: “With the current 15 basis point reduction the policy rate has reached the level of 0.9%, which ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy.” The MPC added that the inflation outlook and the cyclical position of the real economy point to maintaining the 0.9% base rate for an extended period.

How to kick start the economy

In spite of the – as the government put it, well earned – acknowledgement by Fitch, the Hungarian economy is not out of the woods yet. According to business weekly Figyelő, the cabinet was so taken aback by the weak GDP figures for the first quarter of 2016 that Prime Minister Viktor Orbán was quick to order a “crisis meeting”, and as an outcome of the consultations, he asked for a proposal by the Economy Ministry on how to boost the economy. Ágnes Hornung, state secretary at the Economy Ministry in charge of finances, told Figyelő that a stimulus package is in the making, but revealed no further details.

The latest figures on investments have not changed things for the better either: The volume of investments in Hungary was down by 9.6% year-on-year in the first quarter of 2016, the Central Statistical Office (KSH) reported at the end of May. The fall in investments was primarily the outcome of the completion of developments financed from EU sources, and was not a huge surprise as poor GDP data had already suggested that investments had also been hit hard by the drying up of EU funds. Data shows that private investments have been on a descending path for several quarters now. The volume of investment only grew in some sections representing small weight, such as investments in electricity, gas, steam and air conditioning supply, and developments connected to renewable energy sources.

Things to watch in the coming weeks

Retail data for April will be released on June 3, although only first estimates, with the recent favorable trend expected to continue. Not so good news will arrive the following week: A second reading of the poor Q1 GDP data will be published on June 7, and industry figures for April will also be published that day. The consumer price index for May is scheduled for June 8, and construction data for April will come out on June 15.