Risk survey endorses Hungary’s investment-grade prospects

The sky's the limit for Hungary’s investment-grade prospects

Upgraded risk scores from economists and other experts in Q3 2015 have seen Hungary’s investment-grade claims receive further endorsement.

The country is now awarded slightly more than half the 100 points available, and has kept close on the heels of Bulgaria and Romania, which are similarly improving in the survey, but are already rated investment grade according to Fitch and Moody’s.

Hungary has moved back into the third of ECR’s five risk tiers, a position that is normally indicative of a triple-B rating, but are the agencies poised to make the change?

Solid case despite drawbacks

Olivér Kovács, an ICEG European Centre research fellow, states that in terms of hard statistics “it seems that Hungary has been on an improving track”.

This is borne out by decent economic growth rates for a second year in a row, which are expected to continue into the second half of this year, albeit at a slower pace as the effects of EU transfers, a bumper harvest, auto-sector investments and other temporary factors fade.

Hungary is vulnerable to a downturn in Europe, too, in light of its highly open, export-dependent economy.

However, inflation is negligible – keeping borrowing costs low – the unemployment rate is gradually falling and, moreover, the fiscal deficit has shrunk substantially.

Public debt is high, but its structure is vastly improved owing to the central bank’s “self-financing plan” and strong demand for government bonds reducing the share of liabilities denominated in foreign currency.

The conversion of all retail foreign currency loans to forints, which was one of Hungary’s main sources of vulnerability, has been removed from the banking system.

“The deficit may even come in below 2% of GDP this year [underperforming the 2.4% target],” believes Gergely Tardos, head of research at OTP Bank.

Others are less confident, but keeping the deficit below 3% with a comfortable margin seems assured.

The combined current and capital-account surplus moreover provides resilience to declining EU transfers and it can be added that Hungary has repaid an IMF loan early.

ICEG’s Kovács believes there is some debate to be had over how the government has achieved all this, noting among other things the populist political system, unorthodox policies and lack of full central-bank independence.

Andras Vertes, chairman of GKI Economic Research, sounds a note of caution, too, pointing to slowing economic growth, the strains caused by the migrant crisis and tensions in the public sector caused by the government’s policies.

Comparing Hungary with Bulgaria and Romania emphasises there is little distinction overall, but Hungary it is still lagging somewhat on most individual risk indicators, barring corruption and government stability:

However, as OTP’s Tardos points out: “Hungary has been turned from a very vulnerable country to a very resilient one, and even if these factors were well-known for a while it takes time for the markets to accept this.”

With Hungary’s risk score on an upward trend, it cannot be long before the first credit-rating agency breaks cover and finally restores Hungary to an investment grade.

Even GKI’s Vertes concurs, acknowledging the elimination of FX has been successful, alongside the credit for growth programme improving the availability of bank funding, and admitting in spite of his conservatism that “an upgraded credit rating is still possible in 2016”.

Hungary’s diminishing risk profile would certainly justify it.

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