S&P upgraded Hungary to BBB-/Stable: Surprise, surprise

HUNGARY - In Brief 16 Sep 2016 by Istvan Racz

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Well, so much about predicting rating agencies. This morning we sent out our September monthly, in which we expected no upgrade at all today, though attributing a 30% probability to a potential change in S&P's outlook on its previous BB+/Stable to positive. Yet the agency changed its LT/FX sovereign rating to BBB-/Stable, which is a real breakthrough for the country, as it has just received its second investment grade rating after a BBB-/Stable obtained from Fitch in May.Within the analyst community, this decision surprised essentially everyone, though most analysts quickly made the point that the upgrade was not unjustified. It was just unexpected, given S&P's widely known long-time conservatism on Hungary. But this time around, they liked a number of factors, including fiscal stabilization, the unquestionably strong external income account, the recent recovery of GDP growth, and the isolation of the financing of the government and of households from the impacts of FX volatility.Following S&P's decision, a third upgrade to investment grade from Moody's on November 4 seems more likely than ever. The forint, which jumped by two units in the strong direction to EURHUF 308-308.5 in immediate reaction today, is likely to stay moderately stronger in the forthcoming weeks than it would have been on yesterday's rating expectations, most probably implying somewhat lower inflation and less industrial growth as well. Instinctively, we would expect the MNB to become more aggressive in limiting access to its 3-month deposit facility on this basis than it would have been otherwise. As widely known, an announcement on the latter subject is expected from the MNB next week.