March 28 (Bloomberg) -- The outlook on Hungary’s junk-rated sovereign debt was raised to stable from negative at Standard & Poor’s as economic growth accelerates and the government is projected to keep its finances under control.
S&P kept its rating for Hungary’s credit at BB, two steps below investment grade and on par with Croatia and Portugal, the company said in a statement today, citing risks including the highest debt level among the European Union’s eastern members and lack of government policy predictability.
Prime Minister Viktor Orban, leading all polls before elections on April 6, is trying to fortify the economy after a recession in 2012 while keeping the budget deficit within the EU limit of 3 percent of gross domestic product to avoid losing the bloc’s funding. The grants account for more than 95 percent of infrastructure spending.
“The outlook revision reflects the rebalancing of Hungary’s open economy, and what we view as steadying economic prospects,” S&P said in its statement.
The forint strengthened 0.3 percent to 309.92 per euro by 9:44 a.m. in Budapest. It has lost 4.1 percent this year, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg. The forint may be “close to its fair long-term value,” S&P said.
Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s and rival Standard & Poor’s 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 the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields down to records.
S&P’s ranking of Hungary is worse than assessments by peer rating companies. Moody’s Investors Service and Fitch Ratings both rate Hungary one step below investment grade.
Still, today’s S&P decision “is the first move since the series of downgrades that signals a change in the country’s credit prospects,” Janus Samu, a Budapest-based economist at Concorde Securities, said by e-mail.
“We see a large likelihood that a modest acceleration of the economic output and further reduction in the external indebtedness could eventually pave the way for further rating upgrades from other rating agencies as well in the course of the year,” Samu said.
Hungary’s rising exports and the use of EU funds may lift the economy by about 2 percent this year and in 2015, S&P said. The surplus in the current and capital accounts have reduced external vulnerabilities, S&P said.
The economy expanded 2.7 percent in the fourth quarter from a year earlier, the fastest pace in seven years, fueled by a bumper harvest and government spending on construction such as soccer stadiums adding to industrial production.
Hungary’s cabinet relies on extraordinary industry taxes, including bank levies, to close budget holes, which hit investment and lending and pushed the country’s growth potential to a “worryingly low” level, the Organization for Economic Cooperation and Development said on Jan. 27.
Hungary’s sovereign credit grade remains “constrained” by government debt and policy unpredictability, S&P said. The debt level reached 79.2 percent of gross domestic product at the end of last year, making it the highest in the EU’s east.
Using his parliamentary majority that allowed the ruling party to enact any law without opposition consent, Orban’s lawmakers passed a new constitution, ousted the chief justice of the supreme court and stacked the Constitutional Court with ruling party lawmakers and appointed allies to head independent institutions including the audit office and the central bank.
“The hallmark” of “Orban’s governing style has been his willingness to re-purpose the legislative framework to his party’s advantage,” S&P said. “We believe that these institutional changes have weakened the checks and balances between branches of government.”
S&P said it would raise Hungary’s credit grade if government policies encouraged investment, external debt declined in a sustainable way and if the cabinet undertook “structural reforms.”
Accelerating bank deleveraging, the weakening of the economy recovery that would be “significantly” worse than that S&P forecast or the “material” weakening of public or external finances may trigger a downgrade, the company said.
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