Scope: Hungary’s economic strength offsets danger of EU isolation

EU

Despite the growing risks of Hungaryʼs political isolation from European allies due to the politics of the present Orbán government, the Hungarian economy is shielded by “robust growth” and “well-managed public finances,” says German rating agency Scope Ratings.

Scope argues that despite the European Parliamentʼs approval of the Sargentini Report last week, which found a “clear risk” of a serious breach by Hungary of the values of the European Union, there remain “significant hurdles to jump before sanctions could come into force,” pointing to the unanimous vote among EU members that would be needed to implement penalties under Article 7 of the EU Treaty.

“Hungary has strong economic fundamentals, supported by fiscal policy that continues to bring public debt down to a more sustainable level, supporting its BBB/Positive outlook credit rating,” says Bernhard Bartels, an analyst at Scope.

Driven by investment, accommodative policies, and significant EU fund inflows, real GDP growth in Hungary rose from 2.2% in 2016 to 4% in 2017. For 2018, annual growth is forecast at 4%, twice the EU average. Scope also notes that foreign investors are still confident in Hungary, with German manufacturers such as Daimler expanding facilities, or even initiating projects, like BMW.

At the same time, however, Scope warns that the euro areaʼs slowdown may affect the Hungarian economy, due to its links with German companies. The rating agency also notes that Hungaryʼs current public debt, which stands at around 73.6% of GDP, is high compared to other EU members in the CEE region.

“A more material regional slowdown could test Scope’s public debt sustainability analysis, which foresees a decrease in Hungary’s debt-to-GDP ratio to below 70% over the medium term,” the Scope analysis says.

Hungaryʼs expansionary monetary policy in the face of inflation might be a reason for concern, Scope argues, with globally increasing interest rates putting pressure on the Hungarian forint, which may prompt the central bank to raise rates more aggressively than if it had responded earlier. The forint is down 5% against the euro since the beginning of the year, the analysis notes.

“The nearly uncontested power of the Fidesz government, taking control over the media as well as extending its influence on the judicial system and the banking sector, is jeopardizing trust in public institutions and will test the country’s social cohesion over the medium term”

- Scope analyst Bernhard Bartels

The 2021-2027 EU budget is surrounded with uncertainties, with Hungary rumored to be in line for less support than in the previous period. According to Scope, conditions for access to development funds may also be stricter, tied to the rule of law.

EU funding currently amounts to around 4% of GDP, with 95% of all public investment co-financed by the EU. Scope would consider lower than expected EU fund absorption and any reversal in FDI inflows to be negative rating drivers.

“Political interference and growing EU isolation are longer-term risks; however, given today’s favorable developments, including declining foreign debt, steady private investment inflows and prudent fiscal policies, Scope maintains a constructive outlook,” concludes Bartels.

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