Moody's upgrades Hungary's ratings to Baa2
The upgrade by Moody's was not surprising for two reasons:
- Hungary's ratings at Moody's was one notch lower than at the two other key rating agencies, Fitch, and Standard & Poor’s.
- Moody's has had a positive outlook on Hungary's ratings since September 2020, and this status usually entails either an upgrade or a cut to the outlook to stable within 12 to 24 months.
Moody's said the key drivers for the rating upgrade to Baa2 are the following:
- Hungary's economic resilience is underpinned by the strong growth rebound throughout the first half of 2021, helped by effective fiscal and monetary policies, and further complemented by a strong medium-term outlook building on robust investment, with potential growth of around 3-4% over the next five years.
- Moody's expectation that the projected strong growth rebound and medium-term outlook over the coming years will support fiscal consolidation and reduction in the government's debt burden, which underlines Hungary's resilient fiscal strength.
the resilience of the hungarian economy is also attested by moody's expectation of only a very limited scarring from the coronavirus pandemic. Based on the rating agency's forecasts, Hungary's real GDP level in 2023 will be only about 1.5% lower when compared to the pre-crisis trend.
Moody's expects that the government will use most of the fiscal space created by stronger growth this year. Having said that, given the rating agency's stronger revenue growth assumptions, the projected 2021 general government deficit of 6.5% of GDP is smaller than the Ministry of Finance's forecast of 7.5% of GDP.
Factoring in the revised financing plan for 2021, Hungary will be one of the few sovereigns Moody's rates in the Baa space that will see a decrease in its debt-to-GDP ratio between 2020 and 2023.
The rating agency projects a decline of almost four percentage points, to 76.7% of GDP, and Hungary's debt burden as a share of GDP will narrow the gap to Baa2-rated average and median, which are broadly stable around 65% of GDP.
One long-standing challenge to Hungary's credit profile relates to the contentious relationship with the EU which has recently culminated in the delayed approval of the National Recovery and Resilience Plan (NRRP), and increased the risk that the start of disbursements from the EU's Recovery and Resilience Facility could be delayed into next year.
Having said that, Moody's expects that an agreement will be eventually reached, and that the impact of a temporary delay on growth and government finances will be marginal.
In Moody's view, the government has the means to pre-finance projects identified in the NRRP, which limits the impact on growth. Furthermore, for 2021 the involved amounts (13% of €7.2 billion in total grants) are relatively small, amounting to around 1.3% of the 2021 budget.
"In addition, the significant reduction in external vulnerabilities over the past ten years and the healthy banking sector [...] support Hungary's resilience to shocks. Hungary's external vulnerability indicator, which compares short-term external liabilities to the available stock of foreign exchange reserves, has declined to 119% at the end of 2020, compared to 185% in 2010."
Moody's said challenges to Hungary's long-term growth outlook stem from population ageing and potential difficulties to moving up the value chain, fostering innovation and productivity, and ensuring continued income convergence.
"However, despite facing a significant decline in its working-age population, Hungary's medium- and long-term debt sustainability risks are assessed as medium by the European Commission in its latest Debt Sustainability Monitor."
What could change the ratings up
A stronger focus on fiscal consolidation resulting in a faster reduction of the debt burden than currently envisaged would be credit positive.
Implementation of further structural reforms under the government's "Program for a More Competitive Hungary" and along the points outlined in the central bank's (MNB) competitiveness programme aimed at improving non-cost competitiveness, which help to boost potential growth in the economy, would also be credit positive.
What could change the ratings down
An outright downgrade is unlikely, given the stable outlook and recent upgrade of the ratings to Baa2.
However, the outlook would likely move to negative if fiscal consolidation and debt reduction turns out slower and less pronounced than Moody's expects in its baseline scenario, or is even reversed.
A further deterioration in EU relations, leading to prolonged suspension of EU funds and negatively affecting the business environment would also be negative.
Similarly, the introduction of policy measures that would weaken the economic growth outlook would lead to negative rating pressure.
Cover photo: Getty Images
