BUDAPEST (Reuters) - Moody's said it was keeping its 'junk' rating of Ba1 on Hungary's debt and maintaining a negative outlook, blaming the country's weak growth outlook.
The rating agency also said late on Friday that the large proportion of Hungarian government debt held by foreigners left the country exposed to a potential worsening of investor confidence.
Moody's warning comes just as Central Europe's most indebted nation readies for a possible foreign currency bond issue after its talks with the IMF about a financing backstop collapsed last year.
"While some progress is being made on the deficit and debt metrics, policy measures continue to have a negative impact on the economy's medium-term growth outlook," the rating agency said in a statement.
Moody's said Hungary's economy could grow by just 0.3 percent this year after a contraction in 2012, and its medium-term growth was expected to be significantly lower than that of other economies in Central and Eastern Europe.
"This constrains the government's ability to place the debt trend on a permanent downward path," Moody's said.
Hungary's public debt currently stands around 78 percent of GDP. Its rating was cut to junk by all the three major rating agencies a year ago as growth dried up and investors balked at government policies including Europe's highest bank tax, windfall taxes on energy and telecoms firms and the effective nationalisation of private pension funds.
In December Fitch improved its credit-rating outlook for Hungary to stable from negative, even though the country's loan talks with the International Monetary Fund and the European Union had collapsed after repeated differences over economic policy.
That was the first positive assessment from a major rating agency of the government's efforts to cut the budget deficit below 3 percent of economic output. Moody's estimates the deficit at 2.7 percent for last year.
Responding to the Moody's statement, the government said the rating agency had made its assessment "in a biased way and not based on the facts."
"The Hungarian government does not understand why Moody's Investors does not take into account the results achieved by the Hungarian people in the recent period," the Economy Ministry said in a statement.
It cited the low budget deficit, declining debt, Hungary's ability to finance itself from the markets and its big current account surplus as the biggest achievements.
Investors hungry for high yields have flocked to Hungarian bonds in recent months, driving yields to multi-year lows.
Hungary wants to sell bonds worth 4-4.5 billion euros abroad this year. It has not tapped international markets since 2011.
Moody's said downward pressure on Hungary's rating could arise if the government's commitment to contain the budget deficit to below 3 percent weakened, or if the government took further measures that hurt economic growth by triggering exchange-rate pressures and capital outflows.
The agency said it would consider stabilising the outlook on the government's Ba1 bond rating if Hungary's policies became more predictable and more supportive to growth.
Reporting by Krisztina Than, Editing by Mark Trevelyan