S&P affirms Hungaryʼs outlook as positive

Ratings

Standard & Poorʼs Global Ratings on Friday affirmed Hungaryʼs "BBB-/A-3" long and short-term foreign and local currency sovereign credit ratings.  The outlook on the ratings remained "positive," although S&P pointed to continuing negative rating risks.

"Hungaryʼs strong external profile and track record of fiscal restraint support the sovereign ratings," S&P said. "Relatively weak checks and balances between government branches, moderate long-term growth prospects, high public debt, and [a] so far impaired monetary transmission mechanism are key constraints," it added, as cited by national news agency MTI.

S&P said Hungaryʼs GDP growth rate would approach 3.5% for 2018, supported by "booming consumption," fiscal stimuli and wage hikes, improved absorption of European Union funding, home subsidies, stronger private-sector balance sheets and the ongoing recovery in the eurozone.

However, the ratings agency added that structural challenges, such as poor demographics, a big public sector, weaknesses in the business environment, low productivity and an overheating labor market, would likely slow the pace of average annual GDP growth to just under 2.5% in 2019-2021.

S&P acknowledged the governmentʼs reform agenda aimed at boosting competitiveness and productivity and said some of the governmentʼs "unconventional" policies, aided by a favorable external environment, had reduced Hungaryʼs external vulnerability. However, it added that "weakened checks and balances constrain the predictability of policy-making."

State debt seen gradually falling

S&P put Hungaryʼs general government deficit at 2.2% of GDP, on average, in 2018-2021. It said Hungaryʼs state debt would "reduce somewhat" but remain over 60% of GDP throughout the forecast horizon. S&P acknowledged policy measures that have reduced Hungaryʼs FX debt, while cutting non-residentsʼ holdings and raising the local banking sectorʼs exposure to government debt.

S&P forecast positive credit growth, averaging 4.5-5%, in the banking sector for 2018-2021, after a contraction in 2011-2016. But it noted that the pace of growth remains below that of nominal GDP growth and forecast the share of domestic credit to non-financial private enterprises would remain below 40% of GDP.

S&P said it could raise Hungaryʼs ratings in the next 12-18 months "if recent improvements in the financial sector enhanced the authoritiesʼ ability to influence domestic monetary conditions." Evidence for this would be a stronger recovery of bank lending, continued economic growth, current account surpluses and contained fiscal deficits, it added.

The outlook could be revised to "stable" if lending growth is subdued and banksʼ stock of non-performing loans starts to grow, S&P noted.

"We could take a negative rating action if Hungaryʼs public finances weakened, external vulnerabilities increased, exchange rate policy became more interventionist, or its institutions weakened, for example in Hungaryʼs relationship with the EU, especially if we anticipated fiscal risk associated with such developments," it added.

S&P noted that it has withdrawn its "BBB-" ratings on the National Bank of Hungary at the bankʼs request.

In its previous scheduled review of Hungaryʼs sovereign rating, on August 25, 2017, S&P changed the outlook from "stable" to "positive."

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