Moody's improved outlook to stable from negative for Hungary

HUNGARY - In Brief 08 Nov 2014 by Istvan Racz

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Fact: Moody's improved outlook to stable from negative on its Ba1 government bond rating for Hungary yesterday. The Hungarian sovereign has BB+ from Fitch Ratings and BB from Standard & Poor's on its long-term debt. Moody's based its decision on the following drivers: 1) Improving medium-term economic outlook - after years of deleveraging, investment, consumption and growth are getting stronger on sustainable basis; 2) Commitment to keep the budget deficit below 3% of GDP helped stabilise the government debt ratio, albeit at a rather high level. On medium term, slow decrease in the debt ratio is likely. 3) Decreasing vulnerability to external shocks, due to persistent current account surpluses and high FX liquidity. Significance: This was a modest step compared to what the government and most domestic analysts had been expecting for a while, i.e. returning Hungary to an investment grade rating. Improving the outlook had been somewhat overdue, as a negative outlook seemed inconsistent with Hungary's stable macroeconomic fundamentals. Our own view on Moody's assessment is mixed: we see Hungary markedly improving on domestic (households and companies) and external indebtedness, but we are not assured that the most recent improvement on economic growth is sustainable, as it has been based predominantly on cyclical and one-time factors. Neither do we believe that the current fiscal deficit targets - even though reflecting an improvement from past performance and satisfying EU deficit rules - will be sufficient to eventually secure a declining government debt ratio. (More detail on this will follow in our next monthly report, due early next week.) Forecast: Despite ambitious...