Is Hungary's downgrade to junk status a real threat? Experts share their views

At the Portfolio Budapest Economic Forum conference, key representatives of the Hungarian fund management sector discussed the global macroeconomic situation. The panel discussion is particularly relevant as the Hungarian government is about to kick-start economic growth. he big question is how China's growth will develop and whether Europe can improve its competitiveness.

But there is also no getting away from the fact that the Federeal reserve has just begun its cycle of interest rate cuts, while the situation in the Middle East is becoming increasingly fluid.

The Global Macroeconomic Panorama panel discussion was moderated by Géza Deme (GD), Chairman and CEO of Széchenyi Funds, Zombor Erdélyi (ZE), Deputy CEO of Gránit Fund Management, Balázs Szabó (BSZ), CEO of Hold Fund Management. The discussion was moderated by István Horváth, CEO of K&H Securities.

Is the external environment cooling or heating the Hungarian economy?

GD: The European economy is stagnating, and 25% of our exports go to Germany, which is cooling the Hungarian economy.

BSz: There are structural problems in Germany, the model of the 2010s no longer works. This is partly due to weakening demand in China and partly due to technological progress in China. There are also cyclical issues among the problems of the European economy, such as the slowdown in China or consumer caution. The cycle part can turn positive. Even 3-4% growth in 2025 is not unthinkable, but the big question is whether this can be achieved on a 10-year average.

ZE: The whole German industry is based on cheap energy, now factories are shutting down. These trends are here to stay next year, so they are less optimistic about domestic growth.

Can the Hungarian economy get support from other sources?

ZE: As part of its international strategy, Gránit Fund Management has started to open up to the East, specifically to the region and Central Asia (Kazakhstan, Uzbekistan). Returns are eastwards, especially for alternative investments. These countries are currently where Hungary was in the 1990s. For the Hungarian economy as a whole, the weight of this opening will be small, but it could increase substantially in the coming years, especially as the growth prospects in Central Asia are very favourable.

BSz: Opening to the East has no impact on Hungarian economic growth in the one-year horizon. In the short term, it is domestic services and the challenges that surround us that are worth talking about. China and Germany are now dragging down the Hungarian economy. In Central Asia, we don't have a relationship that can have a meaningful impact on GDP in the short term, if we think only in a 1-2 year perspective.

GD: The European economy is not expected to be strong, so opening up to the East should not be considered as bad mojo, as there are plenty of opportunities there that are worth exploiting. For example, in terms of capital accumulation, knowledge transfer or venture capital. In many cases, opening up to the East means bringing capital to us and integrating into the domestic value chain.

How might global interest rate cuts affect the Hungarian economy?

BSz: High interest rates are no problem either for the US or for the euro area, as they have not been high for long enough to reprice a significant part of the existing stock of debt. For this reason, the interest rate cuts will not have such a beneficial, positive effect. In the case of Hungary, however, interest rate cuts can have a greater impact, but the current base rate of 6.5% will not be able to come down substantially, the 2-3% interest rate will not return. Interest rate cuts could also boost consumption and the housing sector. Moreover, real wage growth will eventually feed through to consumption and this can provide a tailwind. I'm just not at all pessimistic about next year's growth.

ZE: This year could see two or two 25 basis point rate cuts from the ECB and the Fed. The German economy will be helped by the rate cuts as investment financing will be more favourable. The extent of this is questionable, but it is positive. Global interest rate cuts could increase the MNB's room for manoeuvre, but the Hungarian central bank may be more cautious now, mainly because of the forint exchange rate. For this reason, it is not certain that domestic interest rates will track international rates at the start.

GD: The fall in interest rates [ECB, Fed] could also have an impact on Hungarian interest rates. 18-24 months ago, very high interest rates stopped a lot of business plans in their tracks. That period is over, we are not there anymore. Cheaper access to credit can also stimulate domestic consumption and investment.

What do you expect will happen to the blocked EU funds? How realistic is a threat of a credit rating downgrade?

BSz: In total, we are talking about €44 billion in EU funding, up to a half of which Hungary could receive. We make no guesses as to whether we will get the EU funds. So there should be no tailwind from here in the next period, but that is basically the market consensus.

Hungary could find itself in a difficult situation if the external environment starts cooling but Hungarian economic policy tries too hard to turn up the heat.

In such a situation, Hungarian yields could rise sharply and the forint could weaken a lot. At the same time, risks may not materialise and the global environment may become more favourable. In such a case, domestic stimulus measures do not necessarily create interest rate and exchange rate risks.

Szabó does not believe a possible downgrade in the country's credit rating to junk [non-investment] grade, as this will be priced in by the market in advance. Normally, credit rating agencies react to events with a delay.

ZE: I agree with Balázs. We are not afraid of a downgrade, because

two years ago the situation was much worse and we were not downgraded.

Credit rating agencies react late, if a downgrade were to come, it would come when it is already priced in.

GD: I don't expect a downgrade, but it would be very bad if that happened. For a venture capital firm, such an event would not be a factor.

What impact could the EUR/HUF exchange rate have on the country 2025?

GD: I expect the forint to weaken, but it would be good if exports did not improve because of this, but because Hungary produces competitive products. But the forint will not weaken much.

ZE: The theory that a weakening forint is good for the economy seems to be disproved. The depreciation is good for the large multinationals, but as they take the profits home, it is not good for the Hungarian economy. For this reason, the primary objective will be to keep the forint stable.

BSz: I expect that this stimulus will be strong, and if the external environment is robust, the forint will not weaken much, but if the external environment is weak, the forint could take a bigger hit. This is something we should avoid. For example, if the forint is 410 [against the euro] next year, it will have no meaningful inflationary impact.

Cover photo: Portfolio