ANALYST VIEW - Rating agencies still too stringent with Hungary - Morgan Stanley

Hungary is coming out of the economic torpor that has characterised the past ten years: We have recently upgraded our forecasts and now see growth of 3.5%Y this year and 2.5%Y in 2016 (2.9%Y and 2.3%Y previously).

In a research note released on 12 April, Morgan Stanley’s Pasquale Diana said there were clear signs of acceleration in both industrial production and export momentum already in the early part of 2015. Even better figures for both IP and exports have come out since then.

“In addition to a vibrant export sector, we note that domestic demand has emerged from a long period of torpor. In fact, just as in Poland domestic demand components have accounted for most of the growth in recent quarters," Diana added.

He also said that the strength of investment seemed particularly impressive. He attributed this to the fast utilisation of EU funds, which, in his view, should continue until the end of 2015 (the last year in which funds under the 2007-13 programme can be used). “The continuation and expansion of the FGS scheme with FGS+ (worth up to 1.5% of GDP, to expire at end-2015) should add further support to capex, via helping credit creation to SMEs," he said. The London-based strategist also noted that Hungary’s household consumption was also showing signs of life, after several years of weakness.

In his research note published today, Diana noted that he is more optimistic than officials on Hungary’s growth prospects. His GDP forecasts are higher than the European Commission’s 2.8% yr/yr and 2.2% yr/yr, respectively, for 2015 and 2016, and also higher than the IMF’s projections (2.7% and 2.3%).

Diana said he is optimistic on Hungary’s prospects for upgrades.

“We think that the rating agencies’ emphasis on metrics such as external debt is partly misplaced. The recent upgrade by S&P will be followed by further positive rating actions, we think (likely late this year if not next year)," he said. This would mean Hungary’s sovereign debt rating getting back to investment grade.

Marcin Petrykowski, Managing Director, Regional Head Central & Eastern Europe at Standard & Poor's Ratings Services, told Portfolio in a recent interview what Hungary should do to regain its IG status.“Many clients feel the authorities would welcome a weaker currency. While this may be true, the BoP looks supportive for the long-term HUF outlook. Should bank deleveraging pressures and financial sector outflows ease, the strong current account surplus could put pressure on HUF," Diana concluded.

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