Fitch Affirms Hungary at 'BB '; Outlook Positive
KEY RATING DRIVERS
Hungary's 'BB+' rating and Positive Outlook reflect its strong economic growth performance in 2014-2015 and high current account surpluses since 2011, which have supported external debt reduction. The gradual tightening in the budget deficit will also help reduce the general government debt ratio, which is high relative to ratings peers. The expected improvement in the bank operating environment should help revive bank lending. Hungary's GDP per capita and governance indicators are high relative to rating peers.
Hungary's 'BB+' IDRs also reflect the following key rating drivers:-
Fitch expects GDP will grow 2.9% in 2015 after 3.7% in 2014, driven by an acceleration of European Union (EU) funds' disbursements in 2014-2015. Households' consumption is supported by high job creation (the unemployment rate was 6.4% in September from above 10% in 2010-2012), low inflation and relief to household finances following the foreign currency mortgage conversion in early 2015. Fitch forecasts growth to slow from 2016 to 2.3%, as EU disbursement falls markedly, and to remain at about 2.0% in the medium term as private sector investment gradually recovers.
Fitch expects the government deficit will be 2.3% of GDP in 2015 from 2.5% in 2014, supported by higher tax revenues linked to fast GDP growth. A decline in interest payments (expected to be 3.5% of GDP in 2015 from 4.0% in 2014 and 4.5% in 2013) linked to very low interest rates domestically and externally, is helping to contain current expenditure. Fitch expects the headline deficit will be 2.1% in 2016 and will remain close to 2.0% in the medium term as expected tax cuts are offset by improving economic conditions. The structural deficit is likely to remain about stable in the medium term, at 2.5%.
Government debt is set to gradually decline to 72% of GDP by 2017 and would reach 64% by 2022 assuming nominal growth around 5% annually and budget deficit around 2% of GDP. The launch of the self-financing programme to increase domestic ownership of government debt promises to reduce exposure to global financial volatility. The share of non-resident holdings in HUF debt was 26% in September 2015, down from a peak of 42% at end-2012. The share of foreign currency debt (in euro after cross-currency swaps) in total debt was 33% (end-2012: 39%). Investor demand and low interest rates are allowing the authorities to issue longer-term domestic debt, lengthening average time to maturity to an average of 4.4 years in October 2015 from 3.4 in 2010-2013, and reducing refinancing risks.
The current account surplus will increase to 4.3% of GDP in 2015 and remain high over the forecast horizon, reflecting higher exports, low commodity prices, low domestic demand relative to the pre-crisis era and lower external interest payments. Strong current account surpluses in recent years have supported a reduction in net external debt (NXD), to 44.5% of GDP in 2015 from 73% in 2012 (using Fitch's methodology, which differs from national methodology). Fitch expects NXD could be 30% by 2017, although it would remain above the 'BB' median.
Supporting a recovery in bank lending (-9% y/y in September) has become a key policy priority. In Fitch's opinion, the implementation of the Memorandum of Understanding agreed between Hungary and the EBRD, including a cut in the bank tax from 2016 (HUF60bn, 0.2% of GDP) contained in the 2016 budget, would support a strengthening in the banking sector and a recovery in bank lending. It would also be consistent with the government's shift in favour of greater policy predictability towards the private sector.
The main factors that could lead to an upgrade are:
-Greater policy stability and predictability along with improved business environment, for example resulting in stable and predictable framework for the banking sector.
-Continued reduction in external indebtedness supported by current account surpluses.
-Reduction in government debt ratio.
The rating Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood of leading to a downgrade. However, relaxation of the fiscal stance and/or global macro financial shock leading to severe recession or higher financial risks would be rating negative.
Fitch assumes that the Hungarian authorities will maintain fiscal discipline, broadly in line with the targets included in the Convergence Programme submitted to the EU in April 2015.
Fitch assumes that under severe financial stress, support for Hungarian subsidiary banks would come first and foremost from their foreign parent banks.