Fitch Ratings improves outlook to positive on their sovereign BBB-

HUNGARY - In Brief 12 Nov 2017 by Istvan Racz

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Fitch Ratings joined S&P's recent decision to improve the outlook to Positive from Stable on their BBB- sovereign long-term debt rating maintained for Hungary on November 10, the last revision date for a major rating agency this year. Just as a reminder, Moody's similar rating remains at Baa3/Stable, as the latter agency failed to make any rating decision on its latest preset revision day on October 20.Fitch justified the improvement of its outlook by making reference primarily on falling net external debt, a result of recent sizable external income surpluses. In addition, they pointed out Hungary's reliable performance in systematically reducing the government debt to GDP ratio, the strengthening of economic growth in recent years, the improvement of the performance of the domestic banking system, improving external liquidity, and the country's political stability even ahead of its upcoming parliamentary election. In terms of risks, they mentioned the conflicts existing between the government and the EU, and in softer terms, the 'unorthodox and unpredictable' nature of domestic economic policies and the 'strong labor market'. In conclusion, the rating report made clear that an upgrade to BBB would require further significant improvement in structural policies (business environment) and continued debt reduction.We agree with most of what Fitch said, with the exception of their indication of improving external liquidity, where we have a different view, on the basis of MNB data on official FX reserves and short-term external debt. But more seriously, Fitch speaks little or nothing about the key risks that we see, notably (a) the fact that current growth relies too much o...