Fitch affirms Hungary ‘BBB-’ rating, outlook stays ‘stable’

Ratings

Ratings agency Fitch affirmed Hungary’s sovereign rating at ‘BBB-’, just over the investment grade threshold, in a scheduled review on Friday, according to Hungarian news agency MTI. The outlook for the rating is ‘stable.’

“Hungary’s ‘BBB-’ ratings balance its high level of GDP per capita, strong governance indicators and European Union membership against a track record of unorthodox economic policy and high government and external debts,” Fitch said.

However, Fitch acknowledged that “a narrower government deficit and strong current account surpluses in recent years have allowed a decline in government and net external debt.”

External factors main risk to growth

Fitch said it expects GDP growth to reach 3.2% in 2017 and 3.3% in 2018 on the back of higher consumption, supported by a strong labor market, a marked increase in the minimum wage, fiscal loosening and stronger public sector investment funded with EU disbursements.

“Given Hungary’s openness, the main risk to the growth outlook stems from the external environment, especially demand from EU trade partners,” Fitch said.

Fitchʼs GDP growth projections for 2017 and 2018 are well under the governmentʼs forecasts of 4.1% and 4.3%, respectively.

Fitch puts deficits under gov’t targets

Fitch said government finances are benefiting from improved economic conditions and low interest payments and put the general government deficit at 2.3% of GDP in both 2017 and 2018.

Hungary’s government targets deficits of 2.4% of GDP for both years.

Fitch noted that Hungary’s state debt reached 74.1% of GDP at the end of 2016, falling for the fifth year in a row. Fitch said it expects state debt to continue to fall, reaching 71.1% of GDP by 2018.

Fitch pointed out that the percentage of state debt held by non-residents declined to 42% at the end of 2016 from 70% in 2011, reducing the exposure of debt management to potential global financial market volatility.

Reduced risk of bank policy interventions

Addressing the banking sector, Fitch said it expects private sector lending to “increase slightly” in 2017, marking the end of several years of deleveraging.

Profitability in the banking sector has improved on the release of risk provisions, lower funding costs and the reduction in the bank levy since 2016, it added.

“In Fitchʼs view, the risk of further policy interventions damaging the banking sector has now reduced, which improves the system stability,” it added.

Policy continuity expected

Fitch noted that a general election is scheduled to take place in the spring of 2018. “Polls predict the incumbent ruling Fidesz party will win it, suggesting policy continuity after the election,” it added.

Fitch also mentioned “public tensions between Hungary and the EU,” while pointing out that EU membership has been “a major source of economic and financial support” for the country.

“A serious deterioration in the relationship could have potential adverse consequences on the economic outlook in the medium to long term,” Fitch warned.

Rating risks evenly balanced

Fitch said upside and downside risks to Hungary’s sovereign rating are “evenly balanced.”

Among factors that could lift the rating would be a continued reduction in external debt and improved external liquidity supported by current account surpluses; increased confidence in economic policy and an improved business environment; and a sustained decline in state debt as a percentage of GDP. 

A rise in the state debt ratio, or a deterioration in the economic policy framework potentially leading to adverse developments in external or government finances, could lead to a negative rating action, Fitch warned.

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