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Fitch Revises Hungary's Outlook to Positive; Affirms at 'BBB-'
November 10, 2017 / 9:04 PM / 13 days ago

Fitch Revises Hungary's Outlook to Positive; Affirms at 'BBB-'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Hungary - Rating Action Report here PARIS/LONDON, November 10 (Fitch) Fitch Ratings has revised the Outlook on Hungary's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to Positive from Stable and affirmed the IDRs at 'BBB-'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The revision of the Outlook to Positive reflects the following key rating drivers and their relative weights: HIGH A combination of high current account surpluses, European Union (EU) inflows and private and public sector external deleveraging have contributed to a marked improvement in Hungary's net external debt (NXD) position, to an estimated 9% of GDP in 2017 from 53% in 2014 (according to Fitch's methodology, which differs from the Hungarian central bank methodology). NXD is gradually converging towards the 'BBB' peers' median of -1% of GDP in 2017, although measures of external liquidity remain substantially weaker than the median. The current account surplus averaged 3.7% of GDP in 2014-2016, primarily reflecting a still low level of domestic demand and the expansion of the manufacturing export base. Fitch expects the current account balance will trend lower but remain positive, at a forecast 1.6% of GDP by end-2019. MEDIUM Fitch expects government debt will decline to 72% of GDP by end-2017 from 74% in 2016, marking the sixth consecutive year of decline. We expect debt to reach 69% of GDP by 2019 versus the 'BBB' peers' median of 42%. A marked reduction in non-residents' debt ownership has reduced vulnerability to changes in global financial conditions. Foreigners owned 38% of central government debt in August 2017 (including 22% in foreign currency and 17% in local currency) versus 56% in 2014. Fitch expects the government deficit will increase but remain consistent with a falling debt to GDP ratio. The expected widening in the deficit to 2.1% of GDP in 2017 and 2.3% in 2018 from 1.9% in 2016 results from cuts in taxes and increases in expenditure in the run up to the April 2018 general election. The risk of more election-related fiscal slippage is limited given the strong macro environment and large political support for the governing party. Fitch expects some tightening after the election and that the deficit will be 1.9% of GDP by 2019. Fitch expects GDP growth will be 3.7% in 2017 and 3.5% in 2018, up from 2.2% in 2016. The acceleration is primarily driven by domestic demand. Consumption is supported by a strong labour market (unemployment was 4.2% in August 2017), rapid increase in wages and limited inflation. Investment (+25% y/y in 1H17) has been recovering from 2016 as EU funds disbursements are ramped up and banks expand lending again. Hungary also benefits from increasing demand from its main trade partners in the EU. Banks' liquidity has much improved, with the loan-to-deposit ratio at 86% in mid-2017, versus 119% in 2012. Profitability has also improved thanks to reversals of loan loss provisions, reduced funding costs and the cut in the bank tax since 2016. Impaired loans had fallen significantly at end-1H17 to 8.7% of total gross loans from 16.3% at end-1H16, following accelerated bad debt sales in the commercial real-estate and residential mortgage segments. Fitch expects the improvement in asset quality to continue thanks to the favourable macro environment, continued balance sheet clean-up and healthy new loan origination. Hungary's 'BBB-' IDRs also reflect the following key rating drivers: Hungary's GDP per capita and governance indicators are higher than the 'BBB' medians, reflecting the greater economic development and integration with Western Europe. Doing Business indicators are stronger than peers'. EU membership buttresses political stability. GDP growth volatility has been higher than peers. Unorthodox policy moves in the past and a high regulatory burden have affected private investment. Growth has picked up since 2014. Fitch sees potential growth slightly above 2%. Businesses identify labour shortage as a key constraint to faster expansion of economic activity. General elections will take place in April 2018. Polls predict the incumbent ruling Fidesz party will win, suggesting policy continuity after the election. Fidesz benefits from a favourable economic environment and the weakness of the opposition. There have been public tensions between Hungary and the EU. A serious deterioration in the relationship could have potential adverse consequences on the economic outlook and government finances in the medium to long term. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Hungary a score equivalent to a rating of 'BBB+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Macro: -1 notch, to reflect weaker policy credibility resulting from a track record of unorthodox and unpredictable policy moves. While policy predictability has improved in recent years, growth potential has remained low relative to the peer group. - External finances: -1 notch, to reflect the higher net external debt stock than peers. Fitch's own external liquidity measure, defined as the ratio of liquid external assets on short-term external liabilities, has been improving in recent years but is still low versus the peer group. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to an upgrade are: - Continued reduction in external indebtedness and improved external liquidity supported by current account surpluses. - Sustained decline in government debt/GDP. -Increased confidence in the economic policy framework and improved business environment that would support stronger GDP growth potential. The main factors that could, individually or collectively, lead to a stabilisation of the Outlook are: - Renewed rise in government debt/GDP. - Deterioration in the economic policy framework potentially leading to adverse developments in external or government finances. KEY ASSUMPTIONS Fitch assumes that under severe financial stress, support for Hungarian subsidiary banks would come first and foremost from their foreign parent banks. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook revised to Positive from Stable Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook revised to Positive from Stable Short-Term Foreign-Currency IDR affirmed at 'F3' Short-Term Local-Currency IDR affirmed at 'F3' Country Ceiling affirmed at 'A-' Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'BBB-' Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'BBB-' Issue ratings on short-term senior-unsecured local-currency bonds affirmed at 'F3' Contact: Primary Analyst Arnaud Louis Director +33 1 44 29 91 42 Fitch France S.A.S. 60 rue de Monceau Paris 75008 Secondary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 Committee Chairperson Charles Seville Senior Director +1 212 908 0277 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 Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy 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 WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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