Fitch and S&P reviewed the Hungarian rating at the same time, and it was predictable that none of the companies would enter, compared with improving the outlook as a less positive surprise.
Growth: No problem
According to Fitch, the current BBB rating for Hungary reflects strong structural factors, and our macroeconomic picture has become stronger and more stable compared to countries with similar ratings. Nonetheless, the debt ratio is still above average and risks unpredictable economic and pro-cyclical policies.
The company's experts highlight the strong growth of the past few years, which, while slowing slightly from 5.1% in 2018 last year, is still well above the BBB average. Consumption and investment are the main drivers of growth, but cyclical factors and the outflow of EU funds are expected to slow to 3.5% this year and 2.8% in 2021.
Fitch has devoted a special paragraph to their view that Hungary is well placed in the midst of current changes in the automotive industry, and that in the medium term we will be well on our way to switching to electric and hybrid drives. They say that the Hungarian automotive industry, which accounts for 5% of GDP, is attractive for greenfield investments, with examples of BMW's planned factory in Debrecen and the announced battery factory.
Concerning consumption, they point out that while the pace of wage growth may decline slightly, it may still be among the highest in the EU and Hungary may well come out of wage competition because we are still cheap compared to Western Europe.
Right from the outset, S&P pointed out that our strong growth justifies a positive outlook.
The company's experts add that since the February upgrading, Hungarian growth has strengthened and exceeded their expectations, which is why they are now taking action. Like Fitch, this year's growth is expected to be 3.5%, but next year they expect the economy to slow down and our growth to fall to 2.1%. Nevertheless, in the current situation, economists say the economy is showing signs of overheating, but Standard & Poor's also emphasizes our strong competitiveness through low wages.
S&P experts also emphasize that while Hungary's growth rate will decline, we will be able to catch up with the EU in the medium term without a major external shock. The major slowdown is mainly explained by lower EU funds in the medium term after Brexit.
According to S&P, the country's demographic situation is worsened in the long term, especially by the government's reluctance to rely on foreign migrant workers, the uncompetitive SME sector and the over-public sector.
Even though inflation is high, it is no problem
The biggest question of today's two credit ratings was how companies rate inflation above the central bank target band and weak forint. While Fitch acknowledges that the 4.7% figure for January is above target, it believes that after the temporary overshoot, the second half of the year will see a fall in the price, ie the MNB shares its view. Therefore, it is believed that the central bank will not need to tighten despite the weak forint.
S&P also thinks they expect foreign deflation to spill over into the second half of the year, so it will only be temporary to jump above the target. At the same time, they are more cautious about the central bank's expected policies, saying that the risks of overheating are not severe, because wage growth will decline and the MNB may also plan to tighten it.
Budget, debt: keep going this way
As in previous years, a disciplined budget and a decline in the debt ratio are rated favorably by credit rating agencies. While Fitch expects the government target to be nearly double this year's target (1.9 vs. 1%), even this is far from the danger zone. They also emphasize that the medium-term structural deficit target of 1% of GDP will be difficult to meet.
Despite a steady decline in recent years, the public debt ratio is higher than average and is therefore a weakness for the rating. At Fitch, the BBB average is 41%, while Hungarian debt is expected to reach 66.5% of GDP at the end of 2019 (preliminary data released Monday).
The company's experts mention the decline in foreign currency debt as a positive factor, but point out that MÁP + may increase Hungary's financing and carry additional risks in the medium term.
According to S&P, the budget deficit could be closer to the target, and they expect a 2% deficit after 1.2% this year. In their view, a low deficit could continue to support debt reduction and government action could improve the debt profile.
However, there are weaknesses
Fitch acknowledges that Hungary outperforms its rival competitors in the World Bank's government rankings, but that gap has narrowed in recent years. They emphasize the high level of corruption and the excessive state intervention in the economy compared to an EU country.
Similarly, S&P said weaknesses: they see problems with brakes and counterweights, the efficiency of government institutions, and our debt is declining, but it is still above average. In addition, they consider it a risk that the conflict between the Hungarian government and the EU will continue in the future.
What else do we need to do to upgrade?
The two companies' announcements usually conclude what could lead to a possible downgrade or downgrade or a change in outlook. According to Fitch, they could move in a positive direction if:
- Government debt would continue to decline in a sustainable manner and the currency structure would improve.
- Confidence in economic policy would increase.
- the business environment would improve, which would improve our medium-term growth prospects without serious macroeconomic imbalances.
And we should be afraid of a negative step if:
- Economic policy uncertainty would increase, jeopardizing macroeconomic stability.
- The budget situation would worsen and debt decline would reverse.
- The institutional background would be weakened.
Positive outlook reflects increased chances of upgrading Hungary over the next 24 months
– S & P's statement. This would require:
- Stronger and more balanced growth than expected.
- Further improvement in income conditions.
- More than expected reduction of the budget deficit.
However, we can lose the positive outlook if:
- The Hungarian economy is declining more strongly than expected, for example due to the slowdown of the eurozone.
- Our external competitiveness is worsening and the current account deficit is increasing.
- Debt decline is reversed due to worsening fiscal processes.
Moody's will be able to evaluate Hungary next March after the current double rating review. We are one grade lower than them, so no upgrades can be ruled out.
Cover Image: Cem Ozdel / Anadolu Agency / Getty Images