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Fitch Affirms Hungary at 'BBB-'; Stable Outlook
May 12, 2017 / 8:10 PM / in 7 months

Fitch Affirms Hungary at 'BBB-'; Stable Outlook

(The following statement was released by the rating agency) PARIS/LONDON, May 12 (Fitch) Fitch Ratings has affirmed Hungary's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-' with a Stable Outlook. The issue ratings on Hungary's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-'. The Country Ceiling has been affirmed at 'A-' and the Short-Term Foreign- and Local-Currency IDRs at 'F3'. The ratings on Hungary's senior unsecured short-term local currency issues have also been affirmed at 'F3'. KEY RATING DRIVERS Hungary's 'BBB-' ratings balance its high level of GDP per capita, strong governance indicators and European Union (EU) membership against a track record of unorthodox economic policy and high government and external debts. A narrower government deficit and strong current account surpluses in recent years have allowed a decline in government and net external debt. The banking sector is gradually strengthening from a weak position. Fitch expects a cyclical upturn in GDP growth to 3.2% in 2017 and 3.3% in 2018 from 2.0% in 2016. The main growth drivers will be higher consumption, supported by a strong labour market (the unemployment rate was 4.3% in February 2017, down from 5.7% a year ago) and a marked increase in the minimum wage (+15% in 2017), fiscal loosening and stronger public investment supported by a recovery in EU fund disbursements. Given Hungary's openness, the main risk to the growth outlook stems from the external environment, especially demand from EU trade partners. Fitch assumes potential growth is slightly above 2%, low relative to the peer group, in part reflecting a weaker policy environment. Government finances are benefiting from improved economic conditions and low interest payments. With an eye on the 2018 general election, the authorities have increased spending and cut taxes (including corporate income tax and social contributions) in 2017, while keeping the budgeted deficit below the 3% of GDP EU criterion. Fitch expects the deficit to increase to 2.3% of GDP in 2017 and 2018 from 1.8% in 2016. This policy choice may increase growth in the short term but it also increases exposure of government finances to a potentially weaker economic environment. Government debt reached 74.1% of GDP at end-2016 from 74.7% in 2015, marking the fifth consecutive year of decline since 2011. Fitch expects the gradual decline to continue and for debt to reach 71.1% of GDP by 2018. The stock of debt owed to non-residents has declined markedly to 42% of total central government debt at end-2016 (25% of foreign-currency debt plus 17% of local-currency debt owed to non-residents) from 70% in 2011. This has reduced the exposure of debt management to potential global financial market volatility. High current account surpluses in recent years and inflows of EU funds have supported a rapid improvement in the net external debt position, to 24% of GDP in 3Q-2016 from 73% at end-2012 (according to Fitch's methodology, which differs from the Hungarian central bank methodology). Fitch estimates the current account remained in strong surplus in 2016, at 4.9% of GDP. The agency forecasts it will narrow, as domestic demand improves, but remain positive, supporting further decline in net external debt. Foreign currency (FC) reserves at the central bank were USD26 billion at end-2016, down from USD42 billion in 2014. The rapid fall in the stock of reserves reflect FC loans conversion by the banking sector, for which the central bank provided a total of EUR8.5 billion in 2015 and 2016, and the repayment of government FC debt. FC reserves are still about EUR6 billion above short-term external debt according to the central bank. Fitch's own external liquidity measure, defined as the ratio of liquid external assets on short-term external liabilities, has been improving steadily in recent years, primarily as a result of the rapid fall in external debt. Fitch expects bank credit to the private sector to increase slightly in 2017, marking the end of several years of deleveraging. Profitability has improved thanks to reversals of loan loss provisions, reduced funding costs and the cut in the bank tax since 2016. In Fitch's view, the risk of further policy interventions damaging the banking sector has now reduced, which improves the system stability. Fitch expects the improvement in asset quality to continue thanks to a favourable macro environment and stricter regulatory standards. A general election is scheduled to take place in spring 2018. Polls predict the incumbent ruling Fidesz party will win it, suggesting policy continuity after the election. There have been public tensions between Hungary and the EU. EU membership is a major source of economic and financial support for Hungary. A serious deterioration in the relationship could have potential adverse consequences on the economic outlook 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 and low growth potential relative to the peer group. - External finances: -1 notch, to reflect the higher net external debt stock than peers. 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 Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are evenly balanced. Nonetheless, the following risk factors could individually or collectively trigger positive rating action: - Continued reduction in external indebtedness and improved external liquidity supported by current account surpluses. -Increased confidence in the economic policy framework and improved business environment that would support stronger GDP growth potential. - Sustained decline in government debt/GDP. The main factors that could lead to negative rating action 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. 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: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) 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. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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