Hungary Debt Rating Cut at S&P on Economic-Growth Prospects

Hungary Debt Rating Cut at S&P on Economic-Growth Prospects
The parliament building is seen beneath the Margit bridge on the River Danube in Budapest, Hungary. Photographer: Akos Stiller/Bloomberg

Hungary’s credit rating was lowered to two steps below investment grade at Standard & Poor’s, which said the government’s policies are eroding medium-term economic-growth prospects.

The country’s long-term foreign- and local-currency sovereign ratings were reduced one level to BB, S&P said in a statement today. The grade, on par with Portugal and Turkey, has a stable outlook, signaling the ratings company is more likely to keep it unchanged than to cut it or raise it. Hungary’s government said the decision is “frivolous.”

Hungary is in its second recession in four years. The government backtracked last month on a pledge to cut a special bank tax in half next year as part of a salvo of measures to keep the budget deficit with the European Union limit of 3 percent of economic output. S&P said it expects the government to meet its fiscal targets in the “short term.”

“This move in the ratings is a bit hard to justify,” Timothy Ash, head of emerging-market research at Standard Bank Group Ltd. in London said in an e-mail. “It does kind of make you think what planet the ratings agencies are on these days.”

The forint weakened 1.1 percent to trade at 282.62 per euro at 7:45 p.m. in Budapest from 279.48 yesterday. Yields on the government’s benchmark 10-year bond rose 1 basis point, or 0.01 percentage point, to 6.925 percent by the close in Budapest.

‘Marginal Effect’

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for Standard & Poor’s. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

Hungary’s downgrade “is going to have a marginal effect on the bonds as most of the market has been expecting a BB at some point,” Jeremy Brewin, who helps manage more than $5 billion in emerging-market debt at Aviva Investors in London, said by phone. “I don’t think it’s going to collapse at all. Funding is being done effectively. I do expect them to come to market again in the next couple of months.”

The cost of insuring Hungarian debt against non-payment for five years using credit-default swaps fell to 302 basis points from 304 basis points yesterday, according to data compiled by Bloomberg. That compares with 281 basis points at the beginning of November and 598 basis points a year ago. Higher spreads indicate a worse risk perception.

Bond Sale

Hungary last tapped international markets in May 2011, when it sold 1 billion euros ($1.3 billion) of bonds maturing in 2019 at 270 basis points more than the benchmark swap rate. Poland, rated by S&P at A-, the fourth-lowest investment grade, sold 750 million euros of 2024 bonds at 135 basis points above mid-swaps this month. A basis point is 0.01 percentage point.

Hungary lost its investment grade last year at Fitch Ratings, S&P’s and Moody’s Investors Service, while the forint plunged 15 percent against the euro in the second half of 2011, the most in the world. The currency has gained 11.9 percent this year as liquidity boosting measures in the U.S. and Europe helped emerging-market assets and investors bet an aid agreement with the International Monetary Fund was close.

The government targets budget deficits of 2.7 percent of gross domestic product in 2012 and 2013, while the European Commission sees the shortfall at 2.9 percent in 2013 and 3.5 percent in 2014.

‘Increasingly Difficult’

The government’s policies, including exceptional measures applied to the financial industry, may erode the country’s medium-term growth potential, S&P said. Measures taken in recent months that place the burden of fiscal adjustment on some key services sectors may reduce banks’ willingness to lend and companies’ propensity to invest, it said.

“This could eventually undermine the government’s efforts to sustainably reduce general government debt,” S&P said in the statement. “Although we expect the government’s fiscal targets to be met in the short term, we believe that this could become increasingly difficult if, as we expect, economic growth remains muted.”

S&P expects Hungary’s economy to grow 0.8 percent in 2013 followed by real per capita growth of about 1.7 percent on average in the medium term, according to the statement. The Cabinet sees the economy expanding 0.9 percent next year.

‘Downgrade Itself’

The downgrade is “frivolous” as the ratings agency acknowledges the performance of the Hungarian economy while downgrading it, the Economy Ministry said in an e-mailed statement today.

“The time has come for S&P, a lobby institution of speculators, to downgrade itself,” the ministry said. “Hungary is not evaluated by the ratings companies, but by the investors who brought direct investment to the country.”

Fiscal measures “could eventually undermine the government’s efforts to sustainably reduce general government debt,” S&P said in the statement. General debt will decline to 73 percent by year-end and then will probably stagnate at about 71 percent, S&P said.

The public debt level fell to 77.1 percent at the end of the third quarter, the lowest since the last quarter of 2008, compared with 77.7 percent at the end of July, according to data published by the central bank today. The ratio in Portugal, rated by S&P at the same level as Hungary, will rise to 119.1 percent by the end of the year and to 123.5 percent next year, the European Commission said Nov. 7.

IMF Talks

Hungary turned to the IMF and the EU for financial aid a year ago as the forint plunged to a record low against the euro and the country’s credit rating was cut to junk. Talks for a loan of about 15 billion euros have been delayed because of Prime Minister Viktor Orban’s resistance to meet legal and economic terms set by the lenders.

“It seems that S&P were just as bored as the market in waiting a year for an IMF deal,” Peter Attard Montalto, economist at Nomura International Plc in London said in an e-mail. “S&P now stands below the other agencies and we still see the other agencies going further and Fitch should cut in mid-December.”

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