Fitch Affirms Hungary at ‘BBB-‘; Outlook Positive

Fitch Ratings has affirmed Hungary’s Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at ‘BBB-‘ with a Positive Outlook.

KEY RATING DRIVERS

Hungary’s ratings balance strong structural indicators compared with ‘BBB’ medians against relatively higher public and net external debt, a higher level of policy unpredictability and macroeconomic volatility. An improving trend for these latter factors is reflected in the Positive Outlook.

Real GDP growth picked up significantly in 2017 to 4.2%, reflecting a combination of favourable external environment, high EU-funded capital spending, strong wage growth and policy stimulus ahead of general elections. Growth is likely to remain around 4% in 2018, reflecting a continued strong cyclical upturn. Hungary has a track record of higher economic volatility than the ‘BBB’ median and unorthodox policy decisions, and growth potential is constrained by unfavourable demographics, labour shortages and the expected fall in EU transfers after 2020.

Inflation jumped to 2.4% on average in 2017 (2016:0.4%) but remains below the central bank’s target of 3%.

The authorities expect to maintain accommodative monetary policy while eurozone monetary policy remains loose. Some imbalances may be emerging as the output gap turns positive: unit labour costs are rising, driven by strong increases in real wages (+10.3% in 2017) and housing prices again increased by nearly 10% during the year.

However, Fitch expects the economy will slow down after 2018, as monetary and fiscal policy may tighten and as EU fund disbursements slow.

Public finances have improved in recent years. The budget deficit, at an estimated 2% of GDP in 2017 (on an ESA 2010 basis) remained below the 3% of GDP EU criterion, and Fitch expects the authorities to continue complying with this rule over the forecast horizon, despite the recent announcement of potential further tax cuts.

Public debt, at 71.7% of GDP at end-2017, continued to decline but remains well above the ‘BBB’ median of 40.7%.