Hungary’s economy is set to grow by around 3% over the coming years driven by EU funds, corporate investments and private expenditure offsetting risks from its high public debt and institutional challenges, Scope Ratings says.
“The upside potential from better-than-expected economic and fiscal outcomes outweighs the challenges of a still-high public-debt burden, the country’s low non-price competitiveness and labour shortages, as well as weakening institutional credibility and economic policy predictability,” writes Rudolf Alvise Lennkh, in Scope’s rating report, which last week changed the Outlook to Positive on Hungary’s BBB rating.
Annual real GDP growth has averaged 3.1% since 2013.
Over the coming years, Scope expects robust economic expansion to continue, supported by strong private consumption arising from the healthy labour market as well as the rising minimum wage.
Public consumption is also likely to increase steadily in the short and medium term, stimulated by a higher absorption of EU structural funds.
Hungary is the sixth-largest recipient of EU funds in absolute terms and the first in terms of GDP, with EUR 22bn in EU structural and cohesion funds allocated over the 2014-2020 period.
However, despite a continued downward trajectory since 2011, Hungary’s public debt of 73% of GDP in 2017 remains relatively high compared to that of peers and well above the Maastricht threshold of 60%. Scope’s public-debt sustainability analysis foresees only a gradual decrease in the debt-to-GDP ratio to slightly below 70% over the medium term, significantly above that of peers.
In addition, relatively weak non-price competitiveness, reflected in subdued productivity growth and labour shortages, is a significant credit weakness and potential drag on Hungary’s long-term economic growth prospects.
Scope also notes that the government’s contentious relationship with EU institutions and its consolidation of political power at the expense of independent entities, which especially affect the central bank and judiciary, have increased the unpredictability of economic policy, the regulatory system, and the ability to conduct business in a transparent and predictable environment.
The Positive Outlook reflects Scope’s view that these developments may continue after the expected re-election of the current government on 8 April 2018, but not materially worsen Hungary’s economic and fiscal prospects.
Source: Press Release