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“Stable Outlook”: Standard and Poor’s Upgrades Hungary’s Rating To Investment Grade

By Tamás Székely // 2016.09.19.

Standard and Poor’s raised its long and short-term foreign and local currency sovereign credit ratings on Hungary to ‘BBB-/A-3’ from ‘BB+/B’, putting the country back in investment grade. S&P also raised its rating for the National Bank of Hungary (NBH) to ‘BBB-’ from ‘BB+’. The outlook on both Hungary and the NBH is stable. The upgrade reflects stronger economic performance, fiscal improvements, declining external financing and leverage needs and “a gradual moderation of activist monetary policies”.

S&P said it now expects Hungary’s economy to grow at an average clip of 2.5% a year in 2016-2019, up from a 2.0% forecast in its previous review in March. The agency pointed out a “marked improvement” in Hungary’s external financial profile after the 2008-2009 global financial crisis. Hungary has not had a current-account deficit since 2009, and it was a net lender to the rest of the world to the tune of 8% of GDP in 2015, it noted. It sees the contribution of tax-rich domestic demand to overall GDP growth increasing, positively impacting government finances. The agency projects the public finance deficit will narrow further to 1.8% of GDP in 2016 from 2.0% in 2015, though it is expected to widen slightly to 2.5% in 2017. S&P forecasts Hungary’s state debt-to-GDP ratio will “maintain its downward trajectory over the medium term”, falling to 68% in 2019 from 72% in 2015.

Speaking at an event for economists in Kecskemét, in western Hungary, Economy Minister Mihály Varga said Standard and Poor’s analysts had noticed the successful reform of Hungary’s economy and that growth has stabilised. Meanwhile, the public debt has declined and the internal structure of the debt improved, he added. The upgrade will bring about a decline in yields in the near future and Hungary’s vulnerability will continue to decline, though the public debt level is still high compared with the rest of the region, he said. Varga said, however, that productivity and efficiency in the economy needed improvement in the future. Hungary is the weakest among the Visegrad Group of countries when it comes to productivity, he noted.

Varga also referred to “new challenges” on the labour market, saying that whereas the jobless rate was now well below the European Union average, employers were now complaining of labour supply problems. Among the ten professional areas where demand for labour is highest, both the very highly qualified and the low-skilled are needed, he said. Of the 100,000 unfilled jobs in the country, half are in the private sector, Varga noted, adding that labour shortages are geographically spread “very unequally”. Wage pressure would make life difficult for domestic businesses. “We are further ahead in making productivity gains than in wages,” he said. Varga said addressing low productivity, ironing out regional discrepancies on the labour market and sorting out the skills shortage will be the main focuses of policymaking moving forward.

CIB Bank chief analyst Mariann Trippon said nobody had expected S&P to upgrade Hungary. Most analysts thought the ratings agency would change its outlook for the country to positive from stable. ING Bank analyst Péter Virovácz also said the decision surprised markets and analysts. An upgrade by Moody’s in November is practically “in the bag”, he added. Moody’s, which rates Hungary “Ba1”, one notch below investment grade, will next review the country on November 4.

via and MTI