Now only Orbán can torpedo Hungary's rating upgrade back to IG - Citi
One step closer to regain investment grade
Moody’s affirmed Hungary’s long term FX credit rating at Ba1, one notch below investment grade and improved the outlook from stable to positive on a regular review published late on 6 November (last Friday).The move did not come unexpected and catches up to Fitch, which is also rating Hungary one notch below investment grade (BB+) but has already assigned positive outlook to the rating in May 2015, noted Eszter Gárgyán, a Budapest-based analyst at Citi, in a research note. She also reminded that S&P is one step behind as it has upgraded Hungary from BB to BB+ in March 2015 with stable outlook. She thinks it is thus likely to lag behind with further rating changes.
Declining FX debt vulnerability and more stable growth structure
Gárgyán underlined that Moody’s has cited sustained downward trend in government debt, reduction of FX related vulnerability and external debt vulnerability and improving growth outlook as key rationales for outlook change.“In our view, stable 2-3% annual household consumption growth may support medium term GDP growth prospects. Still, the stock of external funded government debt remains a key source of risk," she said.
“In fact, Hungary’s net international investment position (the balance of external assets and liabilities) has been closing the gap relative to Poland’s external position.
Prospects for upgrade to investment grade
Following the move, Hungary is rated one notch below investment grade with positive outlook at two major rating agencies (Fitch and Moody’s).This [...] suggests that barring unexpected external shocks or adverse policy twists, Hungary has good chances to regain investment grade and thereby attract new types of foreign portfolio investors as the FX portion of government debt is likely to decline sharply in 2016.
Factors to watch
All eyes are now on Fitch’s next regular rating which is due on 20 November.Gárgyán expects external environment to remain supportive, whereas the reduction in EU fund absorption may bring temporary decline to investments in 2016. Overall, GDP growth may remain between 2-2.5% in the medium term. External debt reduction is likely to continue given Hungary’s external surplus of 7-8% of GDP (including current and capital accounts).
“Domestic policy environment, often cited by rating agencies as source of uncertainty, remains the most critical factor to a rating upgrade, in our view. Recent political communication suggests that the proposed banking tax reduction from 2016 may be conditional upon corporate lending activity, in line with the NBH’s SME lending program, which may revive tensions with local banks while private sector loans are still contracting,"
Gárgyán said.Erste Group CEO Andreas Treichl warned last week that if Hungary fails to respect the agreement it had signed in February with Erste and EBRD, Erste will not sell a 15% state in its Hungarian subsidiary to the Hungarian state.
