Fitch Affirms Hungary at 'BB+'; Outlook Stable

Fri Jun 6, 2014 12:04am EDT

(The following statement was released by the rating agency) LONDON, June 06 (Fitch) Fitch Ratings has affirmed Hungary's Long-term foreign currency Issuer Default Rating (IDR) at 'BB+' and its local currency IDR at 'BBB-'. The Outlooks are Stable. The issue ratings on Hungary's senior unsecured foreign and local currency bonds have also been affirmed at 'BB+' and 'BBB-', respectively. The Country Ceiling has been affirmed at 'BBB' and the Short-term foreign currency IDR at 'B'. KEY RATING DRIVERS The affirmation of Hungary's sovereign ratings reflects the following key rating drivers: Gross general government debt (GGGD), at 79.2% of GDP in 2013, is around twice the 'BB' and 'BBB' medians and remains Hungary's key rating weakness. The public debt ratio has changed very little in recent years despite considerable fiscal consolidation and the return of private pension assets to the public sector. Fitch forecasts that the debt ratio will fall gradually in the medium term as deficits remain moderate and economic growth picks up, and that the share of foreign currency denominated debt (currently 41%) will gradually fall, reducing vulnerability to volatility in the HUF exchange rate. However, in the agency's baseline scenario, public debt will still be above 70% towards the end of the decade, generating large annual gross borrowing needs and rendering it vulnerable to economic or financial shocks. Average GDP growth in Hungary remains below that of its 'BB' and 'BBB' peers. Growth accelerated and unemployment fell sharply in 2013 and early 2014, leading Fitch to raise its growth forecast for 2014 to 2.7%. However, the key growth driver has thus far been an increase in public sector activity (jobs schemes and stronger EU funds absorption), raising questions about the sustainability of the recovery. Conventional and unconventional monetary policy measures, including a Funding for Growth Scheme are also helping to boost economic activity. Fitch deems evidence that private sector activity is strengthening is still tentative at this stage. The external balance sheet continues to improve owing to a substantial (3% of GDP in 2013) current account surplus (CAS) and ongoing deleveraging. Fitch expects the CAS to remain substantial in the medium term as export capacity is ramped up and net inflows of EU funds remain strong. This facilitates the ongoing process of external deleveraging. Fitch forecasts that net external debt will fall to 43% of GDP (on IFS methodology, which differs from national methodology) from 65% in 2013, although it will still be some way above the 'BB' (20%) and 'BBB' (11%) medians. A mitigating factor is that intercompany loans make up one-quarter of external debt. The banking sector is adequately capitalised in aggregate, although there is considerable disparity among individual banks. The sector enjoys solid HUF liquidity. Non-performing loan ratios remain high and rising, and banks' operating environment is unfavourable. Outstanding FX mortgages had fallen to 15% in 2013 from 27% of GDP in 2011, but remain sizeable and the risk of a solution that increases the burden on banks has not dissipated. The re-election of Fidesz in April 2014 with another two-thirds majority is likely to mean that the government will continue to mix fiscal discipline with economic policies aiming to increase the domestic footprint in sectors such as banking and energy. Hungary's GDP per capita is high, relative to 'BB' and 'BBB peers, reflecting its high level of economic development and integration with Western Europe. EU membership underpins domestic politics and institutions. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger positive rating action are: - A discernible reduction in the public debt ratio and further lowering of the foreign currency share. - Continued, sustained reduction in external indebtedness. - Evidence of stronger growth prospects supported by an improved business environment and greater policy stability. The main risk factors that, individually or collectively, could trigger negative rating action are: - Sustained fiscal slippage that endangers debt sustainability. - Policy missteps that pose risks to the inflation and currency outlook, which could in turn exacerbate macro-financial risks. - A global macro-financial or geopolitical shock, leading to a severe recession or loss of financial market access. KEY ASSUMPTIONS - Fitch assumes the Hungarian authorities will maintain fiscal discipline, broadly in line with the targets included in the Convergence Programme submitted to the EU in April 2014 - Fitch does not factor into its debt sustainability any impact from a EUR10bn bilateral credit line agreed with Russia in March 2014 for the construction of a new nuclear plant. Information regarding the drawdown and repayment schedules of the loan is scant at this juncture, although Fitch understands that these are spread over a period stretching beyond the horizon of the agency's debt sustainability analysis. - Fitch assumes that under severe financial stress, support for Hungarian subsidiary banks would come first and foremost from their parent banks - Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Contact: Primary Analyst Matteo Napolitano Director +44 20 3530 1189 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Alex Muscatelli Director +44 20 3530 1695 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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