Hungary Sees More Upgrades After Fitch Returns Investment Rating

  • Long-term rating raised to BBB- from BB+ with stable outlook
  • Country has been rated below investment grade for five years

Hungary’s economy minister said he expects the nation’s credit to be raised by two other rating companies after it regained investment-grade status from Fitch Ratings.

Fitch became the first of the largest three credit assessors to reward Prime Minister Viktor Orban’s push to reduce public debt and reverse measures that contributed to downgrades five years ago.

"We expect a similar positive decision by the other two main rating companies after the upgrade by Fitch, " Economy Minister Mihaly Varga told reporters Saturday in Budapest.

Fitch late Friday raised the nation’s long-term rating to BBB- from BB+, assigning a stable outlook. That leaves it on par with Bulgaria, Romania and Russia. Moody’s Investors Service and S&P Global Ratings both have Hungary one step short of investment grade.

"We see a further reduction in yields partly as a result of this step," Varga said. If at least one more rating company upgrades Hungary, debt financing may be about 40 billion to 60 billion forint ($146 million-$214 million) lower in the next 12 to 18 months, he said.

Debt Declines

Gross general government debt will probably be 73.2 percent of gross domestic product by 2017, down from 75.3 percent at the end last year and a peak of 80.8 percent in 2011, Fitch said. The credit rating company forecasts that debt will slowly decline in the medium term.

"A potential change in the forint rate may only have a minor impact on Hungary’s economy this time," Varga said. He sees the currency "slightly" strengthening from current levels versus the euro after the upgrade.

Hungary’s forint increased 0.1 percent to 315 per euro last week after weakening for three weeks.

“Tighter fiscal policy has been consistent with a gradual decline in government debt from a high level,” Fitch said in a statement Friday. “Following the self-financing program to increase banks’ demand for government bonds, the sovereign’s debt is less exposed to external risks.”

Healing Process

The upgrade is the latest stage in the healing process for Hungary’s $120 billion economy, which needed an International Monetary Fund bailout in 2008. Recession prompted Orban to nationalize $11 billion of private pension assets and introduce Europe’s highest bank levy, steps that contributed to his nation’s junk status. The government has since rid households of toxic foreign-currency loans, narrowed the budget deficit and trimmed the bank tax to improve creditworthiness and boost its allure among investors.

Fitch’s upgrade “is a net positive for the market, but a lot has to be done for this to trigger a long-term positive reaction,” Bruce McCain, who helps manage $35 billion as chief investment strategist at Key Private Bank in Cleveland, said by phone. “But it is important in the sense that the market has come to recognize that the peripheral countries in Europe, like Hungary, have improved significantly from where they were.”

While the yield on 10-year government debt surged to as high as 10.7 percent after Hungary’s first downgrade in 2011, meager returns in developed markets, central bank rate reductions and sturdier public finances helped reduce borrowing costs to 3.39 percent as of Friday.

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