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Still no upgrade from Moody’s

The ratings agency does not share the government’s optimism, and the Brexit vote probably didn’t help.

An Audi TT Roadster gets finished at the factory in Győr. Motor vehicle manufacturing output was up 6.9% in May, year-on-year.

Moody’s Investors Service declined to upgrade Hungary’s sovereign debt rating at the beginning of July, meaning the country is still at investment grade with only one of the three main credit ratings agencies. Analysts were disappointed, but they unanimously expect an upgrade from Moody’s during its next assessment in November.

Hungary’s industrial output declined again on a monthly basis in May, following a one-time jump in April. According to second estimates published by the Central Statistics Office on July 13, industrial output grew an unadjusted 9.2% in May compared to the same period of last year, but as there were two more working days in May 2016 than in the same month a year earlier, the calendar-adjusted figure came to 4.2%.

On a month-on-month basis, output once again declined, this time by 0.7%. Except for April, when a 5.4% jump was measured, industrial output has kept falling month by month since the beginning of the year: The biggest slump, 1.1% was registered in March, while there was a 0.8% and 0.1% setback in February and January, respectively. All this indicates that the jump reported in April was only a temporary one, and the slowing economies in Western Europe, especially Germany, are affecting Hungary as well. The slowing data in May is also due to the fact that recent changes to production structures, such as temporary downtime due to product upgrades, and a planned slowdown in production, still influence Hungary’s industrial performance.

Output in the manufacturing sector was up by 9.7% in May, final and detailed figures show. “The fact that output increases ranged between 6.2% and 17.2% in 12 out of the altogether 13 branches indicates balanced growth,” the government commented on the numbers. Output in motor vehicle manufacturing was 6.9% compared to May 2015. Output in road vehicle components was also up by 14.4% in the same period. Data further showed a 10.8% year-on-year growth in the rubber products manufacturing sector, a key supplier of the car industry.

The manufacturing of electrical products recorded output growth of 17.2%. Within this sub sector, all divisions saw expansion. Output in the third largest sub sector, the manufacturing of food, beverages and tobacco products, increased by 6.3% y.o.y.

Brexit not included in data

The aggregate data in the first five months of the year is 3% higher than the corresponding 2015 data. The latest figures do not show the worsening market sentiment that followed the U.K.’s vote to leave the European Union at the end of May.

Putting things in a wider perspective, the Hungarian government emphasized in a note on the kormany.hu website that industrial output has grown by 32% since the change of government in 2010, and attributes the y.o.y. growth to the output growth in the metal and rubber product manufacturing sectors. The 5.7% y.o.y. growth in the volume of new orders signals further expansion, the government said. A month earlier, the volume of new orders grew by 6.8%.

However, not everyone shares the government’s optimism. In spite of previous expectations, Moody’s Investors Service did not change Hungary’s Ba1 sovereign debt rating on July 8, meaning Hungary is at investment grade only with Fitch Ratings.

Brexit has created significant uncertainties, therefore it is not clearly seen yet which direction the markets might take and what sentiment will be like in the global economy, and all these can be reasons for Moody’s not taking action regarding Hungary’s upgrade, wrote the National Economy Ministry in a press release.

Analysts were disappointed by the rating institutions’ decision too. portfolio.hu cites Gergely Ürmössy, head analyst at Erste Bank as saying that there is a chance for a November upgrade from Moody’s (that is when the rating institution’s next review for Hungary is scheduled). The analyst added that if the poor GDP data of the first quarter does not improve, Hungary might be stuck in the “junk” category for quite a while. However, he expects the growth rate of the Hungarian economy to stabilize in the next quarters, so that it will reach 2% this year. He doesn’t see significant impacts caused by Brexit, and also expects the budget deficit to remain low in the upcoming period.

Mariann Trippon, head analyst at CIB Bank was not surprised by the decision of Moody’s. As she reminded, it usually takes a year from improving outlooks to actual upgrade, and Moody’s only improved outlooks for Hungary last November. She also mentioned Brexit as a possible driver behind the decision. Péter Virovácz, head analyst at ING Bank agreed, mentioning that Moody’s postponed the upgrade decision in spite of macro data that suggested an upgrade, such as the massive surplus in the current account, decreasing debt ratio, and a strict budget. If the situation following the U.K. vote settles and the Hungarian economy faces no negative shock, Moody’s is very likely to lift Hungary to investment grade status at its next review in November, the analyst said.

Numbers to watch in the coming weeks

On July 15, the Central Statistics Office will publish the May performance figures for the construction sector. On July 20, we’ll find out how much money Hungarians made in the January-May period, and five days later, when retail trade data for May is released, we’ll find out how much they spent.