Standard and Poor’s Ratings Services last Friday affirmed its ‘BB+/B’ long- and short-term foreign and local currency sovereign credit ratings on Hungary. The outlook for Hungary remains stable, S&P said.
S&P also affirmed its ‘BB+’ long-term issuer credit rating on the National Bank of Hungary: “The stable outlook balances our assessment of Hungary’s declining external vulnerabilities and steady headline fiscal performance amid the ongoing cyclical recovery against its still-high general government indebtedness, less-predictable policymaking, and weak underlying growth potential.”
Could go either way
Factors that could lead to an upgrade include improvements in the economy’s longer-term growth prospects, allowing for more fiscal space and enabling a faster reduction in general government indebtedness, the ratings agency said.
“We could also raise the ratings if we were to view policy-making as having become more transparent and predictable, or if we were to assess that the country’s institutions were strengthening, or if we had better visibility on longer-term risks.” A material weakening of Hungary’s public finances or an increase in external vulnerabilities could prompt a downgrade.
“We could also lower the ratings if we were to view increasing disincentives to the central bank to effectively fulfil its price-stability mandate or if we saw the transparency of key institutions weakening further, especially if we anticipated an eventual fiscal risk associated with such weakening,” S&P said, adding that Hungary’s ratings are supported by its lower external vulnerabilities, including a lower level of FX state debt and reduced ownership of sovereign debt by non-residents.
“The ratings also benefit from our assessment of Hungary’s comparatively advanced economy and relatively diversified export structures”.
S&P noted a “considerable” improvement in Hungary’s external financial profile since 2009, pointing to deleveraging as well as a reduction in external issuance of government debt in favour of domestic issuance and increased sales of government securities to households. The strong performance of net exports, particularly auto exports, gave Hungary a higher current account surplus than any other economy in the Visegrád Four.
The agency said its sovereign ratings on Hungary “remain constrained” by “a less predictable policymaking environment, low potential growth and high general government indebtedness”. The emigration of skilled workers and weak capital accretion would weigh on underlying growth. S&P complained that “increasing opaqueness” around institutions such as the central bank “reduces our visibility of future risks both in and outside the financial sector”.
It said that certain central bank policies could “potentially hinder [the central bank’s] willingness and ability to pursue its inflation-targeting mandate in the future”. The bank’s assumption of interest rate risk via its provision of interest rate swaps to the market will create losses if and when policy rates are raised, which is at odds with inflation targeting, S&P explained, while conceding that inflationary pressure would probably not recur in Hungary until late 2017.
S&P also acknowledged National Bank programmes to normalise lending, particularly to SMEs, as well as the reduction in vulnerability resulting from the conversion of retail FX loans into forints.
The agency said its base-case scenario over the 2019 forecast horizon assumed that improved tax revenue and interest savings would be used for expenditures or to balance tax cuts in other areas, rather than for debt reduction. Thus it said the general government deficit would “not narrow significantly” from 2pc of GDP and state debt as a percentage of GDP would reach 74pc in 2019.
“Even if the pace of deficit reduction is faster than we currently anticipate, we think it unlikely that net general government debt would be lower than 60pc of GDP by 2019,” S&P said.
It counted among downside risks to the base-case fiscal forecast further state acquisitions, an expansion of fiscal programmes to support a slowing economy, electoral considerations, budget spending on big projects, such as an upgrade of the Paks nuclear power plant, the materialisation of contingent liabilities, such as for guarantees to the state-owned Magyar Eximbank or Hungarian Development Bank, or the possibility of the recapitalisation of the central bank by government finances.
Government still optimistic
The government reiterated that it expects upgrades by at least two of the three big ratings agencies this year, putting Hungary into the investment-grade category.
The Ministry of National Economy said the affirmation of the rating was “in line with expectations” and noted that the agency had acknowledged Hungary’s good economic performance, its reduced external vulnerability and improved fiscal balance. S&P had also pointed out increased domestic ownership of state debt and a lower level of FX state debt, as well as positively assessing the country’s well-trained workforce and balanced export structure.
The ministry said earlier in March – after Moody’s did not update Hungary’s sovereign rating, though a review had been scheduled – that the government expects at least two upgrades this year.
S&P, Moody’s and Fitch all rate Hungary one notch under investment grade but the outlooks of Moody’s and Fitch are both “positive”.