TEXT-S&P cuts Hungary's rating to 'BB', outlook stable
Overview -- In our view, the predictability of Hungary's policy framework continues to weaken, which could affect the country's medium-term growth prospects. -- We are therefore lowering our long-term foreign and local currency sovereign credit ratings on Hungary to 'BB' from 'BB+' and our long-term counterparty credit rating on the National Bank of Hungary (the central bank) to 'BB' from 'BB+'. -- The stable outlook balances our assessment of Hungary's still-high fiscal and external liabilities and recurrent use of unorthodox, and possibly unsustainable, economic policies against its success in reducing fiscal deficits to less than 3% of GDP and containing external liquidity pressures by achieving current account surpluses. Rating Action On Nov. 23, 2012, Standard & Poor's Ratings Services lowered its long-term foreign and local currency sovereign credit ratings on the Republic of Hungary to 'BB' from 'BB+'. We affirmed the foreign and local currency short-term ratings at 'B'. The outlook is stable. We have assigned a recovery rating of '3'. The transfer and convertibility assessment remains 'BBB'. We have also lowered the long-term counterparty credit rating on the National Bank of Hungary (the central bank) to 'BB' from 'BB+'. Rationale The downgrade reflects our opinion that the government's unorthodox policies, including exceptional measures applied to the financial sector, could erode the country's medium-term growth potential. This could eventually undermine the government's efforts to sustainably reduce general government debt. Although we expect the government's fiscal targets to be met in the short term, we believe that this could become increasingly difficult if, as we expect, economic growth remains muted. In our opinion, measures taken in recent months--which continue to place the burden of fiscal adjustment on some key services sectors, particularly the financial sector--could weigh on Hungary's medium-term growth prospects by reducing further banks' willingness to lend and companies' propensity to invest. In particular, the imposition of tax hikes and levies on various services--including the telecoms, energy, and financial sectors--may depress private investment and job creation, although we note that the authorities have introduced several schemes aimed at supporting small businesses and that the manufacturing sector has not been affected by fiscal adjustment measures. Bank sector deleveraging in Hungary has been more pronounced than in other countries in the region, although we note that the sector has benefited from capital injections from foreign parent banks, most recently in 2012. As a result, we expect that credit supply to the economy, a crucial driver of growth, will remain stagnant in the medium term. Like much of Europe, the Hungarian economy is currently experiencing a contraction; we expect it to fall by 1.2% in real per capita terms in 2012. Real GDP remains about 5.0% below its 2008 peak. Continued fiscal rationalization, an unpredictable tax environment, and tight credit conditions will likely weigh on the economy in the short term, and we anticipate a muted recovery in 2013, with real GDP per capita growth of 0.8%. After 2013, we forecast real per capita growth to strengthen to about 1.7% on average in the medium term. Our projections are based on the government's current fiscal consolidation plans, an assessment of measures designed to support the labor market, and our assumption of no growth in the eurozone in 2013 and 1.2% growth in 2014. We anticipate that the government will meet its objective of keeping fiscal deficits below 3% of GDP over 2013-2014, using the accruals-based European (ESA 95) accounting standard, but we believe that from 2014 the authorities will face increasing difficulties in keeping the general government deficit in line with its projections, given the low-growth environment. That said, we acknowledge that our forecasts are subject to revisions in either direction, as economic growth prospects--and therefore the outlook for public finances--depend on domestic credit conditions, the policy environment, and external developments. The Hungarian economy, which we consider to be very open, is dependent on trade with the eurozone, particularly to Germany. We expect net general government debt to ease to 73% of GDP at end-2012, but then to stagnate at about 71% if there is no increase in economic growth. Our calculation of net general government debt is more restrictive than national measures, as it deducts from the general government debt only the most liquid assets, such as currency and deposits held at the central bank. Roughly 40% of commercial general government local-currency debt is held by nonresidents. While we view this as a positive factor in terms of diversified funding, the financial crisis in late 2008 illustrated the rapidity with which local currency bonds held by nonresidents can be sold if investor confidence falters. This increases pressure on the balance of payments, the exchange rate, and, therefore, debt servicing capacity. Although the foreign currency component of general government debt has fallen, it remains high at an estimated 42% of the total, which makes the debt burden highly sensitive to exchange rate fluctuations. Hungary's current account has been in surplus since 2010, and there has been a sharp correction in the country's net external liability position. External debt net of liquid assets is estimated to be 55% of current account receipts in 2012, down from a peak of just over 80% in 2009. Although we view the stronger external performance positively, we see that Hungary still faces substantial refinancing needs, particularly in the short term as the government amortizes its debt to the IMF and EU. The ratings are supported by what we view as Hungary's comparatively advanced economy, highly skilled labor force, and relatively well-diversified economic and export structures. The recovery rating on Hungary's foreign currency debt is '3', indicating our view that post-default recovery would likely be about 50%-70%. The recovery analysis assumes a default stemming from a sharp adjustment in the country's exchange rate. Under this hypothetical scenario, the recovery rating is supported by our view of the country's flexible and open economy. Outlook The stable outlook balances our assessment of Hungary's still-high fiscal and external liabilities and recurrent use of unorthodox, and in our view possibly unsustainable, policies against the government's success in reducing fiscal deficits to less than 3% of GDP and the benefits afforded by current account surpluses. We could raise the ratings if we saw that the government were to use its strong majority in parliament to establish policies that encourage investment, while implementing its structural reform program. Similarly, we could consider an upgrade if we saw a sustained reduction in external debt net of liquid assets, even as economic growth strengthens. Conversely, we could lower the ratings if Hungary's economic recovery weakens significantly more than we currently expect, if banks accelerate their withdrawal of credit, or if we saw external or public finances weaken materially. Related Criteria And Research -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011 -- Criteria For Determining Transfer And Convertibility Assessments, May 19, 2009 -- Introduction Of Sovereign Recovery Ratings, June 14, 2007 Ratings List Downgraded; CreditWatch/Outlook Action/Affirmed To From Hungary Sovereign Credit Rating BB/Stable/B BB+/Negative/B Senior Unsecured BB BB+ Recovery Rating (Foreign Currency) 3 Transfer & Convertibility Assessment BBB Short-Term Debt B Hungary (National Bank of) Issuer Credit Rating BB/Stable/-- BB+/Negative/-- Senior Unsecured BB BB+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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