Economy
Moody's cuts Hungary's outlook over mounting fiscal woes
The outlook for Hungary's foreign currency country ceiling for bonds and notes was changed to "developing" , pending resolution of Moody's policy on foreign currency country ceilings for medium- to long-term bonds and notes.
Hungary's country guideline for local currency obligations and its local currency bank deposit ceiling remain at Aaa and are not affected by the outlook change.
Moody's attributes the outlook changes primarily to Hungary's deteriorating fiscal balance .
"Annual fiscal deficit targets in Hungary are periodically revised upward by significant amounts. To date, however, neither of the two main political parties has exhibited the necessary commitment to rationalizing local public administrations or to reforming the provision of health and education so as to reign in consolidated budget expenditures," Moody's said.
"Further, competitive tax cutting by regional neighbors in an effort to attract foreign investment means that Hungary cannot easily raise taxes in order to balance budgets . This leaves Hungary reliant mainly on a strategy predicated on rapid economic growth leading to higher revenue and attraction of foreign capital inflows to cover large deficits. In recent years, this strategy has not succeeded in lowering budget deficits," Moody's said.
"The country's entrance into the European Union's exchange rate mechanism (ERM II ), the antechamber to adoption of the Euro, will likely be postponed further into the next decade than currently envisaged by public pronouncements in the country.
In addition, with non-residents holding a significant proportion of total forint debt, and deteriorating fundamentals, Moody's sees an increased risk of currency speculation.
Attempts to counter such pressures through higher domestic interest rates, however, would slow economic growth and government revenues, leading to larger budget deficits, greater public sector borrowing, and more onerous debt servicing costs .
The Republic of Hungary has a favorable public sector debt maturity structure . Market spreads suggest that Hungary is no longer perceived to be within the emerging markets universe. Rather, current spreads reflect the country's status as a full member of the European Union. Relative to past performance and current rating peers, however, the country's creditworthiness may be deteriorating on the margin," Moody's said.
Hungary's country guideline for local currency obligations and its local currency bank deposit ceiling remain at Aaa and are not affected by the outlook change.
Moody's attributes the outlook changes primarily to Hungary's deteriorating fiscal balance .
"Annual fiscal deficit targets in Hungary are periodically revised upward by significant amounts. To date, however, neither of the two main political parties has exhibited the necessary commitment to rationalizing local public administrations or to reforming the provision of health and education so as to reign in consolidated budget expenditures," Moody's said.
"Further, competitive tax cutting by regional neighbors in an effort to attract foreign investment means that Hungary cannot easily raise taxes in order to balance budgets . This leaves Hungary reliant mainly on a strategy predicated on rapid economic growth leading to higher revenue and attraction of foreign capital inflows to cover large deficits. In recent years, this strategy has not succeeded in lowering budget deficits," Moody's said.
"The country's entrance into the European Union's exchange rate mechanism (ERM II ), the antechamber to adoption of the Euro, will likely be postponed further into the next decade than currently envisaged by public pronouncements in the country.
In addition, with non-residents holding a significant proportion of total forint debt, and deteriorating fundamentals, Moody's sees an increased risk of currency speculation.
Attempts to counter such pressures through higher domestic interest rates, however, would slow economic growth and government revenues, leading to larger budget deficits, greater public sector borrowing, and more onerous debt servicing costs .
The Republic of Hungary has a favorable public sector debt maturity structure . Market spreads suggest that Hungary is no longer perceived to be within the emerging markets universe. Rather, current spreads reflect the country's status as a full member of the European Union. Relative to past performance and current rating peers, however, the country's creditworthiness may be deteriorating on the margin," Moody's said.
