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High hopes for a better rating

There is reason to believe that Hungarian debt will finally shake off its junk-bond status by the end of the year.

Citibank’s report is upbeat

Domestic factors still support the growth of the Hungarian economy, balancing external risks, Citibank said in an analysis issued after a visit to Hungary in early September. According to Citibank analysts, the slow pullback of foreign investors from the Hungarian bond market is likely to continue, but the possible upgrades by credit rating agencies might attract a fresh crowd of investors to the Hungarian market. The U.S.-based bank expects economic growth of 2.8% this year, and 2.3% in 2016, with a 2-2.5% growth potential in the medium-term.

Major international credit rating agencies issued notes on Hungary and the region recently, scrutinizing the possibility to put the country’s bonds back on the investment map. Hungary is still in the junk category with all three rating houses, but while Moody’s and Standard & Poor’s had left the country’s outlook as stable, Fitch changed it from stable to positive at the end of May. The latter will review Hungary’s credit rating in November and, according to analysts, is the most likely of the three institutions to upgrade Hungary.

But all of them seem to be noticing chances of improvements here

Government actions to stimulate domestic consumption have had a positive effect on Hungary’s economy, and the planned gradual reduction of the bank levy was also a good move, Moody’s Investor Service said in a report last week. At the same time, the rating agency identified risk factors too: “We expect growth over the next three years to average around 2.3%. However, government debt levels – although on a declining trend – are still relatively high and represent the country’s main credit challenge,” said Alpona Banerji, vice president-senior credit officer and co-author of the report.

The report states that Moody’s would consider upgrading Hungary’s government bond rating if there were signs of sustained growth prospects supported by greater policy stability, or if there were strong evidence that debt is falling. Downward pressure on the rating could stem from any weakening of policymakers’ commitment to containing the budget deficit to less than 3% of GDP, or the introduction of measures that would affect the growth outlook, the rating agency warned. Moody’s forecasts GDP growth of around 2.7% in Hungary in 2015, down from the 3.6% recorded in 2014. The country’s three-year growth forecast is lower than the 2.8% average expected for the rest of Central and Eastern Europe.

Fitch, though, expressed a slightly different view on Hungary’s debt level situation in its special report issued on September 11. In changing the outlook to positive in the spring, it had referred to the remarkable improvement Hungary’s external metrics had performed. It specifically mentioned that since 2010, Hungary had recorded high current account surpluses, at 4.2% of GDP in 2014, reflecting strong goods and services exports following industrial expansion and lower external interest payments linked to external debt deleveraging. Banks’ external debt has materially reduced, at 20% of GDP at end-2014 from a peak of 39% of GDP in 2008. It also highlighted the rapid decline in Hungary’s net external debt, to 56% of GDP at end-2014 from 90% in 2009, as one of the key drivers behind the change of the outlook in May.

In its recent report on Hungary, Fitch noted that the repayment of foreign currency loans extended to the private sector before 2008 has been an important driver of banks’ external deleveraging. “In Hungary, the conversion of remaining foreign currency mortgages (equivalent to 12% of GDP) into local currency in March 2015 accelerated the process,” it said.

Moody’s and Standard & Poor’s seem happy to leave the rating as it is, but Fitch may upgrade Hungary in November.

Standard & Poor’s is expected to release its review of Hungary on September 18. The country’s rating was raised to BB+ in the spring, the highest junk grade, with a stable outlook. In its latest forecast issued on September 11, Morgan Stanley projected that rating agency Standard & Poor’s will upgrade Hungary’s outlook to positive but keep its credit rating on hold. Morgan Stanley sees Hungary’s growth at 2.9% in 2015 and 2.4% next year, somewhat lower than in its previous forecast (3.5% and 2.5%, respectively).

While Moody’s latest publication hit a more neutral tone, Fitch acknowledged that a continuation of the current positive developments could lead to upgrades in outlooks and ratings in the medium-term. Fitch will review Hungary’s credit rating on November 20.