Standard and Poor’s Global Ratings said it revised the outlook on Hungary’s ‘BBB-/A-3’ long and short-term foreign and local currency sovereign credit ratings to ‘positive’ from ‘stable’.
“The outlook revision reflects our expectation that Hungary’s improving economic and external metrics might support ongoing improvements in the financial sector and thus strengthen the monetary transmission channel,” it said. S+P said it expects loan growth to resume and non-performing loans stabilise at around 10% on the back of a gradual recovery in demand for new loans, the recent recovery in real estate prices and measures by the central bank to stimulate lending as well as prudent regulatory efforts.
It acknowledged the impact of a gradual decline in the bank levy on the banking sector’s return to profitability in 2016. S+P believes Hungary’s real GDP growth for 2017 “will approach 3.5%” due to booming consumption triggered by fiscal stimulus and minimum wage hikes; substantial recovery in EU fund absorption; the gradual reduction in the bank levy; rising expenditure on housing subsidies; real wage and employment gains; and stronger private sector balance sheets. But it added that “structural growth challenges” will slow annual GDP growth to “just under 2.5%” between 2018 and 2020.
Standard and Poor’s decision to change the outlook on Hungary’s sovereign rating to ‘positive’ from ‘stable’ shows that the Hungarian government has handled challenges well with its economic policies, which support both financial stability and economic growth, the Hungarian Economy Minister said. Mihály Varga noted that all of the big three ratings agencies had put Hungary back into investment grade last year with ‘stable’ outlooks. Standard and Poor’s has now become the first to change the outlook to ‘positive’, he said.
Although it is uncommon for the ratings agencies to upgrade a sovereign right before general elections, Moody’s and Fitch are soon expected to change their outlooks for Hungary’s rating to ‘positive’, too, Varga said. Investors earlier formed their own positive opinions of Hungary, as is evidenced by the yields on Hungarian government securities which have been around the same level as sovereign debt issued by countries with higher ratings for a while, he added.
Standard and Poor’s acknowledged in its announcement of the rating action that the government’s innovative economic policy measures have contributed to a reduction in the country’s vulnerability and supported its macroeconomic stability, Varga said. Standard and Poor’s said in its analysis that Hungary’s biggest strength is the stability of its economic outlook and the reduction in its external vulnerability, he said. The change of the outlook reflects S+P’s view that non-performing loans in the banking sector will likely decline further in future and banking sector lending will expand at a sustainable pace in the long term, he added.