Economy 7 January 2010, 3:22pm

Moody's says may improve outlook on Hungary's credit rating

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The first positive remark about Hungary credit rating has been made by Moody’s Investor Service on Thursday, only a few days after Hungary has reported an undershoot of its 2009 budget deficit target. On Tuesday, Fitch Ratings said it was unlikely to upgrade Hungary this year. Hungary’s credit rating is one notch lower at Fitch than at Moody’s, but both ratings agency have a negative outlook on the country’s l-t ratings.

Late on Tuesday, Hungary’s Finance Ministry reported a budget surplus of HUF 205 billion for December, against the forecast for HUF +135 bn, adding that the full-year gap came in at 3.6% of GDP (on a cash flow basis, excluding local governments), vs. the call for 3.8%. Based on these figures, it is a realistic expectation that the 3.9% of GDP ESA (accrual-based) goal was met and so the undertakings in the IMF programme remain on track."Clearly the interim government has exceeded expectations regarding fiscal consolidation and the reform agenda," said Senior Analyst Dietmar Hornung, who is also a Vice President at Moody's.

"We see that the government has exceeded expectations so this certainly puts some upward pressure, not on the rating, but in direction of removing the negative outlook," he told Reuters.

Moody's downgraded Hungary's sovereign debt rating to Baa1 with a negative outlook last March, when the previous government collapsed, citing the country's weak financial position.

Hornung, however, ruled out immediate rating action, adding Moody's would assess whether it could withdraw the negative outlook on the country's credit rating in the first half of the year.

"We have to balance the positive development on the fiscal side with some uncertainties that are related to the economic recovery and to the political cycle and the elections that are due this year," Hornung said.

Standard & Poor’s, one of the other two large rating agencies, raised its outlook on Hungary's BBB- ratings to stable from negative in October. Fitch continues to have a negative outlook on Hungarian credit.

To do list

Hornung added that while there were a lot of question marks over the scope of economic recovery in Hungary, the baseline scenario was that the 2010 deficit target was achievable if the next government remained committed to the budget targets.

Hungary targets a budget deficit of 3.8% of GDP in 2010, one of the lowest in the EU, but main centre-right opposition party Fidesz has said the deficit could swell to 7-7.5% of the economy due to one-off spending items not included in the budget.

Looking ahead, Hornung said further structural reforms and measures to increase Hungary's competitiveness could narrow the gap between its Baa1 rating and that of central European peers Czech Republic and Slovakia (A1) and Poland, which is rated A2.

"In case Hungary continues to address issues like the budget, structural deficit and competitiveness issues, there's certainly a case in the medium to long term to close the gap again to the neighbouring countries," Hornung said.

"If they fail to address it would even go to a larger gap."

Thirty minutes have passed since Hornungs remarks were published, but the forint did not react, partly because there is no major surprise in Moody’s standpoint and partly because the sentiment on global money and capital markets is somewhat gloomy that weighs on the HUF, as well.