Rating agency Moody’s Investors Service raised the outlook on Hungary’s “Ba1” sovereign long-term issuer rating, one notch under investment grade, to “positive” from “stable” in a scheduled review last Friday. Both the Ministry of National Economy and the ruling Fidesz welcomed the decision, calling it an “ante-room” to an upgrade.
Previously, analysts’ views were split about equally between no change and an outlook upgrade to “positive”, while Moody’s listed Hungary as “not on watch”. Affirming the rating, key drivers for the outlook change were the downward trend in the government debt stock, which is likely to be sustained in the coming years, with the government debt ratio projected to decline to 74.3 percent of GDP this year and further to below 73 percent in 2016, and the improving economic outlook as the Hungarian economy’s external vulnerability has been greatly reduced through the resolution of the foreign-currency debt overhang of both households and the banking sector, Moody’s said. This should have a positive impact on domestic demand, it added.
Moody’s expects the foreign-currency share in the government debt stock to decline further next year, probably to around 30 percent or even lower from around 34 percent at present. Moody’s also believes that greater policy stability, in particular with regards to the banking sector, should help revive bank lending and support economic growth prospects.
Concurrently, Moody’s also affirmed the Ba1 rating for the National Bank of Hungary (NBH) and changed the outlook to “positive” from “stable”, as the government is legally responsible for the payments on NBH’s bonds.
Rationale for affirming the rating itself is that the public debt ratio is significantly higher than most peers at the Baa3 rating level and will likely decline only gradually in the coming years. In the meantime, the government has very large borrowing requirements, exposing it to higher refinancing risks than many higher rated peers.
Hungary’s gross borrowing requirements stand at around 20 percent of GDP per year compared to Baa3-rated emerging market peers, which typically have borrowing needs of 5-10 percent of GDP, Moody’s said.
The ratings agency would consider upgrading Hungary’s status if the country’s economic and fiscal metrics continued to improve, resulting in a further reduction of the public debt ratio. In particular, an upgrade would be dependent on further confirmation that economic policy-making is more stable than in the past, in turn supporting sustained economic growth, fiscal consolidation and a further reduction of external vulnerabilities.
Conversely, downward pressure on the government’s bond rating could arise following signs of a weakened commitment by policymakers to contain the budget deficit to less than 3pc of GDP, and/or the introduction of policy measures that would negatively impact the economic growth outlook, which in turn would endanger the downward trajectory of the government’s debt ratio, Moody’s said.
The ministry said Moody’s outlook upgrade testifies to the success of reform measures implemented by Hungary. It noted Moody’s is second among the three major international rating agencies that has given Hungary a “positive” outlook for an upgrade after Fitch. Hungary will keep on gradually reducing its public debt over the next years, the ministry said, and it reaffirmed the government’s commitment to keeping the public finance deficit below 3 percent of GDP.
Ruling Fidesz welcomed Moody’s outlook report, saying it proves that reforms are successful and confidence towards the country has strengthened.
On September 18 Standard & Poor’s Ratings Services affirmed Hungary’s junk rating at “BB plus”, with “stable” outlook, also in a scheduled review, disappointing analysts’ expectation for a raise in the outlook to “positive”. S&P upgraded Hungary to “BB plus”, with “stable” outlook, on March 20, skipping an initial outlook upgrade on the previous “BB” rating also with “stable” outlook, to bring it in line with Fitch’s and Moody’s ratings, all one notch below investment grade. On May 22, Fitch Ratings affirmed Hungary’s “BB plus” sovereign credit rating but raised the outlook on the rating to “positive” from “stable”, citing on-going, albeit slow, decline in government debt, the planned cut in the special bank levy next year, and the conversion of household forex mortgages to forint debt. According to published schedules, one more review is expected this year, by Fitch Ratings on November 20.
Three facts
– Moody’s downgraded Hungary to “Ba1” from “Baa3” on November 24, 2011.
– The highest rating ever for Hungary at Moody’s was A1 from November 2001
until December 2006.
– The agency started rating Hungary
in July 1989, with “Baa2”.
