Standard & Poor’s raised its long and short-term foreign and local currency sovereign credit ratings on Hungary from „BBB-/A-3” to „BBB/A-2.”
„The upgrade reflects Hungary’s sound growth prospects, supported by high private savings and real wage gains sustaining domestic demand, as well as the ongoing expansion of export capacity in the automotive and services sectors,” S&P said in its justification for the decision. „While we expect growth to slow toward 2% by 2021, we think Hungary’s small open economy will be able to weather a period of weaker external demand, as well as the expected decline in EU funding,” it added.
„The ratings are supported by Hungary’s resilient export-driven economy, strong external profile, low private-sector debt, and the flexible exchange rate regime. Relatively weak checks and balances between government branches, moderate wealth levels, and high public debt are key constraints on the ratings,” S&P noted.
Hungary’s net external debt had fallen to under 10% of GDP in 2018, from 55% in 2010. Strong domestic demand, supported by wage growth, will likely thin current account surpluses to about 1% of GDP, noted the rating agency.
S&P said budgetary slippages similar to those in 2010-2011 are „unlikely,” but added that the governmentʼs plans to reduce the general government deficit to 0.5% of GDP by 2020 are „optimistic.” It warned that the chance to „put public debt on a sharp downward trend offered by the current cyclical upturn might be missed,” leaving public debt net of liquid assets elevated at above 60% of GDP through 2020.
The agency acknowledged authoritiesʼ measures which have reduced the share of Hungaryʼs FX debt to around 20%, from over 60% in 2010. It also noted a reduction in non-residentsʼ holdings of central government debt to 36% at the beginning of 2018, from around 60% a few years ago.
Hungarian banks „appear to be well capitalized and profitable,” S&P observed, adding that it considers banks’ renewed appetite to lend and stronger financial performance as a sign that the monetary and credit transmission mechanism to the real economy is largely restored.
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