Standard and Poor’s Global Ratings has raised its long- and short-term foreign and local currency sovereign credit ratings on Hungary to BBB-/A-3 from BB+/B, putting the country back in investment grade. According to Prime Minister Viktor Orbán, the hard work of Hungarian people was rewarded with the upgrade.
S&P also raised its rating for the National Bank of Hungary (NBH) to BBB- from BB+. Minister of National Economy Mihály Varga said the decisions are proof of the Hungarian economy’s excellent performance and was long overdue. “Markets priced in this upgrade long ago,” Varga said following the rating agency’s announcement.
He said he agreed with S&P’s conclusions that the growth outlook of the national economy has improved, the public debt has decreased with favourable changes in its structure and the current account has continued to show a surplus.
Orbán said that as the decision has rewarded “the hard work of Hungarian people over several years”, the credit should first go to them.
He said Hungary had acknowledged previous downgrades with a “straight face” in the firm belief that they would later be followed by upgrades rewarding economic revival efforts.
“Hungarian people have worked so hard to show to the world that Hungary is a worthy place to invest in,” Orbán said.
S&P also raised its rating for the National Bank of Hungary (NBH) to BBB- from BB+. The outlook on both Hungary and the NBH is stable, according to S&P. The upgrades reflected stronger economic performance, fiscal improvements, declining external financing and leverage needs, and “a gradual moderation of activist monetary policies”.
The agency said it now expects Hungary’s economy to grow at an average clip of 2.5pc a year in 2016-2019, up from 2.0pc forecast in its previous review in March. S&P pointed out a “marked improvement” in Hungary’s external financial profile after the 2008-2009 global financial crisis.
It noted that Hungary has not had a current-account deficit since 2009, and it was a net lender to the rest of the world to the tune of 8pc of GDP in 2015.
Hungary had reduced the proportion of foreign-currency debt in central government liabilities while also overseeing a fall in non-resident holdings of forint-denominated government securities. “In our view this exempts Hungary from risks of future balance sheet shocks connected to any renewed ‘taper tantrums’”.
Commenting on the NBH’s steps to scale back measures related to its “Self-Financing Programme”, which aimed to move lenders’ liquidity out of central bank sterilisation instruments and into government securities, S&P said it does not anticipate “an outright withdrawal of heterodox measures”, but believes these measures “are less likely to contradict our assumptions of steady economic growth, gradually consolidating fiscal balances, a declining general government debt-to-GDP ratio, a robust external profile and limited contingent liabilities”.
S&P expects the current-account surplus to narrow under 3.0pc of GDP in 2019 from 4.4pc in 2015 on higher domestic demand and rising wage inflation, but it projects Hungary’s external leverage will trend downward.
The agency sees the contribution of tax-rich domestic demand to overall GDP growth increasing, positively impacting government finances. It projects the general government deficit will narrow further to 1.8pc of GDP in 2016 from 2.0pc in 2015, though widen slightly to 2.5pc in 2017.
“Downside risks to our fiscal forecast could arise from further state acquisitions, an expansion of fiscal programs to support a slowing economy, electoral considerations, budgetary spending on large projects such as the Paks nuclear power project, or the materialisation of contingent liabilities, for instance guarantees to the state-owned, rapidly expanding Magyar Eximbank or Hungarian Development Bank.”
S&P forecasts state debt-to-GDP ratio will “maintain its downward trajectory over the medium term”, falling to 68pc in 2019 from 72pc in 2015. The agency put Hungary’s primary surplus, which excludes debt servicing costs, at “slightly below zero over the medium term” as nominal interest rates are likely to rise but real interest rates decline further.
Regarding future upgrades, S&P said it could raise Hungary’s ratings “if government debt declines faster than we project in tandem with a further reduction in sovereign debt-servicing costs, or if the transmission of monetary policy improves”.
The ratings, however, could come under pressure “if Hungary’s public finances weakened materially, if we were to expect a sustained reversal in the declining debt-to-GDP ratio, if contingent liabilities rise rapidly, or if external vulnerabilities build up again contrary to our current expectations.
“We could also lower the ratings if we saw the transparency of key institutions weakening further, especially if we anticipated an eventual fiscal risk associated with such weakening.”
CIB Bank chief analyst Mariann Trippon said nobody had expected S&P to upgrade Hungary; rather most analysts thought the ratings agency would change its outlook for the country to positive from stable.
ING Bank senior analyst Peter Virovácz also said the decision surprised markets and analysts. An upgrade by Moody’s in November is practically “in the bag”, he added.
Moody’s, which rates Hungary “Ba1”, one notch below investment grade, will next review the country on November 4.