Moody’s affirms Hungary’s Baa3 ratings

Ratings

Moody’s Investors Service has affirmed the government of Hungary’s long-term issuer and senior unsecured debt ratings at Baa3. Concurrently, the government’s senior unsecured shelf rating of (P)Baa3 has been affirmed, according to a press release sent to the Budapest Business Journal. The ratings outlook remains "stable."

Robust growth will continue into 2020, although the economy faces a number of short and medium-term challenges, the agency says. Moody’s expects that the near-term growth outlook for Hungary remains strong, forecasting real GDP growth of 4.3% in 2018, and 3.4% in 2019.

Recent announcements of large-scale foreign direct investment, mainly in the automotive sector, will have a positive growth impact over the coming years during the construction phase, but also beyond when export capacities come on stream. Moody’s also expects that the anticipated reduction in the size of future EU funds for Hungary will have a negative effect on the long-term growth outlook beyond 2020.

The authorities remain committed to gradual fiscal consolidation, but the debt burden stays at elevated levels. In Moody’s view, the Hungarian authorities’ continued commitment to maintaining general government fiscal deficits below 3% of GDP is a credit strength.

In addition, the ongoing reduction in the foreign currency share of the government’s debt burden reduces the vulnerability of Hungary’s credit profile to adverse exchange rate movements, such as during the most recent episode of emerging market turmoil that started in April 2018, the agency notes.

Hungary faces a sizable structural fiscal deficit, which underscores the pro-cyclical nature of its fiscal policy, Moodyʼs says. According to the EC’s autumn forecast, Hungary’s structural deficit will deteriorate further in 2018 to around 3.8% of potential GDP, from an estimated deficit of around 3.4% in 2017. 

Balanced risks

Overall there is a supportive institutional capacity, but some gaps constrain policy credibility, according to Moody’s. The "stable" outlook reflects its view that the risks to Hungary’s credit profile are balanced. Robust growth will support the authorities’ gradual fiscal consolidation and debt reduction path, but upside risks are limited.

Moodyʼs said institutional strength in Hungary "remains constrained by the unorthodox policy environment, a history of unpredictable regulatory changes and concerns over transparency, as well as the difficult relationship with the EU," which have the potential to negatively affect investor perception and the business environment.

Nevertheless, Hungary has reduced vulnerabilities related to external and government liquidity risks, which provides a buffer to manage potential headwinds from periods of global financial market volatility, says the agency.

In a related rating action, Moody’s also affirmed the long-term issuer and senior unsecured shelf program ratings of the National Bank of Hungary (MNB) at Baa3 and (P)Baa3, respectively. The Republic of Hungary is legally responsible for the payments on MNB’s bonds. The outlook on the rating remains stable, in line with the outlook assigned to the government’s rating.

Hungary’s long-term foreign currency bond and deposit ceilings remain unchanged at Baa1 and Baa3, respectively. The short-term foreign currency bond and deposit ceilings remain unchanged at P-2 and P-3, respectively.

Finally, Hungary’s long-term local currency bond and deposit ceilings also remain unchanged at Baa1, Moody’s concludes.  

Analysts surprised

Moodyʼs affirmation of Hungaryʼs Baa3 sovereign rating late Friday surprised some analysts, who expected the ratings agency to upgrade the country, or at least change the outlook on the rating to "positive," state news agency MTI reported on Monday morning.

TakarékBank chief analyst Gergely Suppan said that the rating action was "entirely unjustified." Failing to upgrade Hungary shows how far behind ratings agencies are with regard to whatʼs going on in the economy as well as the marketʼs assessment, he added.

Hungaryʼs economy is expanding dynamically, in a balanced and sustainable manner, and the countryʼs net external debt is declining on the back of a high external financing capacity, Suppan noted. Next year, the economy could become a net external lender for the first time, he added.

Raiffeisen Bank senior analyst Zoltán Török said he had expected Moodyʼs to at least change the outlook on the rating to "positive" from stable, considering the reduction in Hungaryʼs financial vulnerability, its current account surpluses, and its low general government deficit. State debt, relative to GDP, is on the decline, with an ever-greater part being financed by households and local banks, while economic growth is strong and the favorable trends are expected to continue, he added.

MTI noted that Standard & Poorʼs and Fitch also put Hungary just over the investment grade threshold, although their outlooks on the countryʼs ratings are both positive.

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