Moodyʼs: Hungaryʼs debt dynamics remain benign in 2016-17

Ratings

Hungaryʼs debt dynamics remain benign in 2016-17, despite challenges to economic growth and deficit revisions, ratings agency Moodyʼs Investors Service said in a report published late yesterday.

“We forecast a slight reduction in the government debt burden over the next two years based on a robust economic growth picture and the governmentʼs commitment to maintaining primary surpluses,” says Evan Wohlmann, an Assistant Vice President and Analyst at Moodyʼs, in the report entitled entitled “Government of Hungary: Debt Reduction On Track Despite Growth Challenges and Deficit Revisions”.

Moodyʼs says it foresees that Hungaryʼs (Ba1 positive) government debt will reach just below 75% of GDP by the end of 2016 and below 74% next year.

“Recent improvements to the fiscal framework provide some assurance of a conservative budgetary stance in the coming years, in Moodyʼs view. Planned fiscal loosening in 2017 largely reverses deficit improvements in 2015-16, although Hungaryʼs underlying debt dynamics remain positive,” the summary of the report says.

Although recent data showed that Hungaryʼs economic growth softened sharply over the first quarter of 2016 to just 0.9% in real annual terms, according to Moodyʼs, the ratings agency still sees challenges to growth as temporary and manageable.

Moodyʼs says it expects investment to recover in the coming months following the start of the new EU funding period. Together with an increase in private consumption and some fiscal easing, this will likely result in growth of around 2-2.5% of GDP over the next two years, according to Moody’s.

The banking sector recovery will support growth dynamics as credit demand is rising gradually, Moody’s expects. This year is likely to mark a turnaround for the sector, reflecting cuts in the banking levy in place since 2013, greater policy predictability, and an improved operating environment, according to the ratings agency.

Additionally, Hungaryʼs vulnerability to currency mismatches has been significantly reduced, Moody’s says. The ongoing resolution of the foreign-currency debt overhang of both households and the banking sector has reduced the economyʼs vulnerability to external conditions, the summary of the report added.

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