ANALYST VIEW - Positive rating actions for Hungary are overdue - Morgan Stanley

MNB in transition

The key event in the next two weeks is the Monetary Council meeting on 22 September, for two reasons, said Pasquale Diana, a London-based analyst at Morgan Stanley, in a research note on Friday.

• “First, the new NBH quarterly forecast will show slower inflation and GDP growth, which will presumably pave the way to a dovish statement. We think that the NBH will refrain from adopting an easing bias, but it is clear that risks are moving in this direction.
• "Second, the NBH will officially move to a 3-month policy rate, which we expect to be where the current 2-week policy rate is (1.35%)," he said.

Diana noted that the new set-up is “designed to push a great deal of the liquidity now parked in the two-week facility into the local bond market, a process that has already started and probably has more to go."

The MNB will be anchoring the 3m rate from now on, and so short-term rates (such as 2-week deposit rates, determined in an auction) should lie somewhere between the overnight rate (0.35%) and the base rate (1.35%), he added.

Diana also thinks that Hungary’s monetary policy has gained “degrees of freedom" thanks to FX loan conversion, and the central bank is “intent on promoting self-financing of the economy."

“The February conversion of the large stock of FX household loans (11% of GDP) into HUF variable-rate loans has contributed to the fall in external vulnerability and removed a structural anomaly in Hungary’s policy framework," the analysts noted.

Upgrade imminent, but not that upgrade

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

S&P is scheduled to publish its review of Hungary’s credit rating on 18 September, and Diana thinks that S&P will upgrade Hungary’s outlook to positive, but refrain from upgrading its rating.

“Positive rating actions are overdue, in our view. Potentially, this could happen as early as in September, with an outlook upgrade by S&P." Diana also thinks that the MNB’s self-financing scheme “should make credit upgrades easier to achieve, via accelerating the fall in external debt."

Moody's Investor Service said in a report late on Thursday it would consider upgrading Hungary's government bond rating "if there were signs of sustained growth prospects supported by greater policy stability, or if there were strong evidence that debt is falling."

“There is a widespread perception that the Hungarian authorities would welcome a weaker HUF. While this may be true, the BoP looks supportive for the long-term HUF outlook. Should bank deleveraging pressures ease, the strong C/A surplus could lead to HUF gains," Diana said.

“We might be at a crucial turnaround in Hungary’s relationship with foreign banks. Many issues remain on the table of course, but the scaling down of the bank tax and the setting up of an Asset Management Company to buy bad loans from banks are important steps forward."

GDP forecasts lowered

Morgan Stanley sees Hungary’s growth at 2.9% yr/yr in 2015 and 2.4% yr/yr next year, somewhat lower than in its previous forecast (3.5% and 2.5%, respectively).

“That said, the underlying story has not changed. Hungary continues to enjoy a recovery in domestic demand from depressed levels. Fiscal policy is turning expansionary after years of austerity, rates are at historical lows and consumers’ debt-service costs are at the lowest level in over ten years," Diana said.

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