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%.

Its ownership and currency structure have significantly improved in recent years and compare favourably with peers, while interest payments are broadly in line with the ‘BBB’ median.

Sustained current account surpluses since 2010 have materially reduced net external debt, a traditional weakness of Hungary’s sovereign creditworthiness. Net external debt fell in 2017 to an estimated 8.5% of GDP (BBB median: -0.8%) based on Fitch’s methodology, and Fitch expects continued, albeit lower, current account surpluses, to keep net external debt on a downward trend over the forecast horizon. External liquidity also remains lower than peers, with FX reserves stable at around 2.6 months of current account payments at end-2017 and the liquidity ratio below peers, but the flexibility of the exchange rate partly mitigates the associated risk.

The banking sector has strengthened over the past two years. Legacy NPLs have been cleaned up to a large extent, profit generation capacity has substantially improved while liquidity and capitalisation metrics are solid; the favourable macroeconomic environment is supportive of asset quality. In Fitch’s view, the risk of damaging policy interventions has reduced, supporting stability in the sector. The large share of foreign-owned assets and low share of publicly-owned banks reduce the risk of contingent liabilities materialising on the state’s balance sheet.

Development and doing business indicators are broadly better than ‘BBB’ medians, reflecting greater economic development and integration with Western Europe. Governance indicators also still exceed those of peers, although the gap with the ‘BBB’ median is gradually narrowing. Fitch estimates that politics and economic policy are likely to remain stable after the April 2018 general elections.

Source: Press release