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Ratings Upgrade in the Pipeline?

The past few weeks saw a busy macro calendar: industrial output, consumer price index and gross domestic product figures were released, and one international credit rating institute revised its outlook for the Hungarian economy, which does not rule out an upgrade next year.

Hungary’s gross domestic product grew by 3.6% in the third-quarter of 2017 from the same period of last year, according to raw data. Seasonally and calendar adjusted and reconciled data shows an increase of 3.8%. The volume of GDP rose by 3.7% in the first three-quarters of 2017 compared to a year earlier.
Although first estimates do not detail the structure of the growth, the KSH said that the main contributors to the growth were market-based services. Zsuzsanna Boros Szőke, department head at KSH added that, in addition, the construction sector also boosted growth in the third-quarter, while agriculture held it back. 
Reacting to the fresh release, the government confirmed its expectation of GDP growth of around 4% for the full year. Some analysts agree, but others are more cautious, putting full year GDP growth at 3.7-3.8%. 
“Hungary’s economy grew dynamically in the third-quarter of this year, a trend accompanied by steadily rising wages, and thus working people have been gaining more and more from economic expansion,” Minister for National Economy Mihály Varga said, commenting on the data. 

Temporary Slowdown

Although Hungary’s industry performed a bit weaker in September than in the previous month, the slowdown is likely to be only temporary. In the ninth month of the year, industrial output showed a 0.7% setback from the previous month, but it is worth noting that in August, the sector grew a robust 5.5% from the same period of last year. 
Of the sections of industry, production rose by 5.7% in manufacturing, representing a decisive weight (96%), and by 14.6% in mining and quarrying, having little weight. The output of energy industry (electricity, gas, steam and air-conditioning supply) decreased by 2.6%.
Another good sign is that the purchasing manager index has been steadily above the 50 points marker, and stood at 59.3 in September and 58.3 in October, this indicates that industry can maintain its growth path in the coming months.
On the other hand, order stocks in the manufacturing sector are still lower than a year ago, they were 9.7% lower in September than in the same period of last year. However, weaker order stock data hasn’t been reflected in industrial performance lately. Favorable global economic conditions and new manufacturing sector projects are also expected to continue to boost the sector’s expansion.
The question is, will we see a 4% (or even higher) GDP growth this year, or not? According to Takarékbank analyst Gergely Suppan, the government’s goal can be reached. “Growth could pick up in the fourth-quarter, raising full-year growth to 4%”, the analyst said in a press release reacting to the Q3 data. The consumption dynamic, the wave of home and office construction, increased state investments supported by European Union funding, new automotive industry capacity and manufacturing industry investments combined could lift GDP growth to 4.2% in 2018, he added.

Ratings Upgrade?

Not everyone shares such a high degree of optimism, Erste Bank senior analyst Orsolya Nyeste, for example, expects full-year growth figures of 3.7% in 2017 and 3.4% in 2018, K&H Bank chief analyst Dávid Németh also predicts 3.7% for this year, but projects a slightly more ambitious 3.5% for 2018. ING’s head analyst Péter Virovácz thinks that the economy can expand above 4% in the fourth-quarter of the year, resulting in a 3.8% expansion for the full year. 
The good news is that one of the major international credit rating institutions acknowledged the favorable macro figures the Hungarian economy has been producing. On November 10, in its regular review, Fitch Ratings revised its outlook on Hungary’s long-term foreign- and local-currency issuer default ratings to positive from stable. 
“A combination of high current account surpluses, European Union inflows and private and public sector external deleveraging have contributed to a marked improvement in Hungary’s net external debt position”, Fitch said in the accompanying statement. The agency also revised its GDP forecast for Hungary: it now expects that the Hungarian economy will grow by 3.7% in 2017 and 3.5% next year.  Changing the outlook to positive usually indicates an upgrade in the sovereign debt in the foreseeable future. A continued reduction in external indebtedness and improved external liquidity supported by current account surpluses, sustained decline in government debt, and increased confidence in the economic policy framework and improved business environment that would support stronger GDP growth potential are factors that can lead to an upgrade, Fitch noted in its statement.

Numbers to watch 

KSH will publish how earnings have changed between January and September on November 23. On the same day, the second reading of retail trade data will be released. On November 28, we’ll find out about investment figures in the third quarter of the year, followed by employment and unemployment data for the period of August-October.