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Hungary on verge of being lifted from junk status

In what was certainly a surprise move, Standard & Poor’s upgraded Hungary’s credit rating in its latest review. The country is now, after five years, all but out of the junk status, and analysts expect Moody’s, the third major credit rating agency, to take a similar step in November.

Standard & Poor’s overcame earlier reservations to upgrade Hungary’s credit rating.

Standard & Poor’s has lifted its rating for Hungary from junk status to investment grade. The rating agency raised its long- and short-term foreign and local currency sovereign credit ratings on the country to ‘BBB-/A-3ʼ from ‘BB+/Bʼ on September 16. 

The upgrade came as a surprise to all, not least because Standard & Poor’s is regarded as a more conservative institute, one that pays the most attention to “soft factors” such as the predictability of economic policy or the general business environment.

While in their spring assessment, S&P sharply criticized economic transparency in Hungary and raised questions about ongoing practices at the National Bank of Hungary, it has seemingly overcome those objections now and admitted the stronger economic performance of the country. S&P expects GDP growth will average 2.5% annually over 2016-2019, up from its forecast of 2% on average in its March review. In 2016, the rating agency projects that the general government fiscal deficit will narrow further to 1.8% of GDP from 2% in 2015, and it also projects that net general government debt will subside to 68% of GDP in 2019 from 72% in 2015. It highlighted the marked improvement in Hungaryʼs external financial profile following the 2008-2009 global financial crisis. The upgrade also reflects the “immunization of the sovereign debt profile from foreign-currency volatility,” the agency said in a statement.

With the current upgrade, S&P’s outlook for Hungary is stable. The rating agency noted that “The stable outlook balances our assessment of Hungaryʼs ongoing cyclical recovery and steady headline fiscal performance over the forecast horizon against its still-high general government debt and unpredictable policy environment.” As for the future, S&P said it could raise the ratings again “if government debt declines faster than we project in tandem with a further reduction in sovereign debt-servicing costs, or if the transmission of monetary policy improves.” The agency also mentions a few factors that could bring ratings under pressure, such as if Hungaryʼs public finances weakened materially, if external vulnerabilities build up again contrary to S&P’s current expectations, or if the agency saw the transparency of key institutions weakening further.

A well-deserved move

While S&P’s move was unexpected by analysts, politicians weren’t taken by surprise, format least according to the ministerial statements. Following the upgrade by Fitch Ratings in May 2016, S&P’s decision to restore Hungary’s status to the investment grade category was the direct consequence of the country’s economic performance, Minister for National Economy Mihály Varga said in a reaction to the upgrade. The achievements of the Hungarian economy and market valuations would have warranted this move some years ago, the minister said.

“Policy makers will likely feel vindicated in regaining the investment grade crown from S&P and pleased with the boost to local rates and bond markets,” Bloomberg cited Phoenix Kalen, a London-based strategist at Societe Generale SA, as saying. The analyst noted, however, that Hungarian policy makers would likely not be enthused about the strengthening forint, which they have been fighting against. The forint strengthened as much as 0.7% against the euro to 307.71 right after the upgrade.

Commerzbank analyst Tatha Ghose said the broader development was not a surprise for them, as they had been expecting at least two agencies to upgrade Hungary before the end of the year. However, he noted that while the GDP-growth now projected by S&P is “not too unrealistic” over the medium-term, Commerzbank forecast significantly slower growth of 1.5%-2% this year.

“Now, with two agencies at investment grade, Hungary is de facto investment grade, and a number of real money asset managers would likely increase their portfolio exposure based on risk criteria alone. That said, Hungarian assets may have already rallied too far in anticipation (obviously, the action of ‘fast money’), and there is likely to be only a modest follow-through over the coming month,” Ghose said.

Following the upgrade, Britain’s leading economic paper, the Financial Times published an article in which it stated that the Hungarian government’s unorthodox economic policy seems to be working. The article emphasizes that Hungary’s economy is doing very nicely. It notes that Orbán’s rightwing agenda has done wonders for Hungarian asset prices, and concludes that “investors’ view of populist policies is that they sometimes work.”

What’s next?

After S&P’s decision, Hungary remains in junk territory only at Moody’s, but a rating review is scheduled there for November 4. Expectations are high about a positive move, so there is a good chance that Hungary would be back in IG at all three of the major rating agencies for the first time in five years.

“Based on credit fundamentals, Hungary appears the main candidate for future upgrades, even accounting for S&P’s rating action of last Friday. Moody’s is now very likely to follow Fitch and S&P’s decisions and upgrade Hungary to IG by year end,” Régis Chatellier, analyst with London-based Sociate Generale said.

Also, after a two-year hiatus, the Hungarian state might reenter the international money markets, issuing an FX-denominated government bond again, according to analysts. The last time Hungary appeared on the international capital market was in March 2014, when it issued U.S. dollar denominated government bonds worth USD 3 billion.

Numbers to watch in the coming weeks

The Central Statistical Office (KSH) will publish the second quarter balance of the general government sector on October 3. Important indicators of the Hungarian economy will come out on October 5, when retail trade turnover for August will be released (a first estimate), and industrial output, also for August, will be out only two days later. KSH will publish the consumer price index for September on October 11.