S&P reveals why it has not upgraded Hungary yet
More time to delve into details
S&P assigned a positive outlook to Hungary’s sovereign credit rating last August, which made a lot of people think that an upgrade could be due a year later. Karen Vartapetov, Sovereign Credit Analyst in charge of Hungary at Standard & Poor's, said the review of countries with investment grades takes a longer time, two years, and Hungary is only at half time. In other words, there is a chance that the country will get its craved upgrade in the following year.Vartapetov said they need a longer period for assessment in order to make sure they have an in-depth knowledge of the given country’s economic processes. As regards Hungary, S&P wants to see how successful the central bank’s lending-stimulus programme will be and what impact it will have on the banking sector. The rating agency would also like to see how the MNB will respond to monetary tightening by the Federal Reserve and the European Central Bank (ECB).
There is a chance of two upgrades for Hungary this year: by Fitch (this Friday) and by Moody’s (end of November).Ratings affirmed
Two weeks ago, S&P Global Ratings affirmed its 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings for Hungary, keeping the outlook positive.S&P had some positive remarks, and also some negative ones. S&P expects Hungary's GDP growth to peak this year at 4% or slightly higher. The main positives are:
- Hungary's strong external profile,
- its resilient export-driven economy,
- low private sector debt levels, and
- the flexible exchange rate regime support the sovereign ratings.
The rating agency that growth is strong, but first signs of overheating will soon require policy response.
[...] in the absence of a decisive policy response aimed at boosting productivity, prolonged overheating could weaken Hungary's external competitiveness and balance of payments performance.
Hungary's economy is set to post another year of strong cyclical growth with real GDP expanding by at least 4%, S&P projects. Accelerating domestic demand, on the back of real wage and employment gains is the engine of Hungary's economic expansion, now in its sixth year.Other key contributors include fiscal stimulus (such as the public works program and housing subsidies); minimum wage hikes; a substantial recovery in EU structural and cohesion fund inflows; the long-awaited recovery of domestic credit growth; and, until recently, firmer eurozone demand.
S&P’s base-case scenario suggests that over the longer term GDP growth should moderate toward potential that the rating agency estimate at around 2.0%-2.5%.This reflects Hungary's structural growth challenges, namely poor demographics--exacerbated by net emigration resulting partly from the official reluctance to accept labor migrants--a large public sector, a challenging business environment, low productivity, and a chronic skills shortage.
Despite Hungary's highly pro-cyclical underlying fiscal stance, we assume that pronounced budgetary slippages similar to those reported in 2010-2011 are highly unlikely. At the same time, S&P believes the government's plans to reduce general government deficits to 0.5% by 2022 might be challenging to implement.S&P forecasts a modest relaxation of headline fiscal performance in 2018, with central government deficits slightly exceeding those last year because of growth supporting spending proposals. This will likely be followed by some consolidation, with deficits stabilizing at 2.0%-2.1% of GDP in 2020-2021.
This suggests that the opportunity to put public debt on a sharp downward trend offered by the current cyclical upturn might be missed.
If this proves to be the case, public debt net of liquid assets is likely to stay elevated at slightly more than 65% of GDP through 2021. This estimate also includes debt liabilities of Magyar Eximbank, which Eurostat has recently classified as part of the general government sector.Outlook
The positive outlook reflects Hungary's strong growth and external performance, and the improved health of the financial sector.
S&P could raise the ratings in the next 12 months if- economic performance continues to be stronger than most peers', partly reflecting a normalization of financial conditions, given banks' progress in strengthening their balance sheets.
- This scenario would also hinge on the authorities' ability to adjust the policy mix to a changing external environment, helping to maintain a current account surplus and keeping fiscal deficits contained.
- Faster income convergence with EU averages could drive an upgrade.
S&P warned it could revise the outlook to stable if
- the downward trend in the stock of nonperforming loans (NPLs) reversed, for example as a result of weaker underwriting standards in state-controlled banks, or an unexpected external shock to Hungary's open economy.
- A negative rating action could also occur if Hungary's public finances weakened;
- external vulnerabilities built up again;
- exchange rate policy became more interventionist; or
- S&P observed further institutional weakening, for example in the relationship between Hungary and the EU, especially if it anticipated an eventual fiscal risk associated with such developments.
