Hungary’s Junk Debt Rating Raised at S&PZoltan Simon
Hungary moved closer to regaining its sovereign investment status after Standard & Poor’s raised its credit grade by one step, citing reduced vulnerability to external shocks and a pickup in economic growth.
The country’s rating was raised to BB+, the highest junk grade, S&P said in a statement on Friday. That’s on par with Russia and Indonesia. The outlook is stable.
S&P revoked Hungary’s investment grade in 2011 after Prime Minister Viktor Orban effectively nationalized $14 billion of private pension funds, levied Europe’s highest bank tax and rejected an international bailout even as debt sales failed. The economy has since returned to growth and the benchmark interest rate fell to a record low. The cabinet has cut foreign-currency debt and, with the budget deficit within the European Union’s limit, has pledged to lower the bank levy from 2016.
“The upgrade reflects our view that Hungary is less vulnerable to external shocks, that its growth and fiscal prospects are improving, and that a series of recent policy adjustments have benefited the sovereign’s monetary flexibility and reduced the risk of future balance sheet recessions similar to those which occurred between 2008 and 2013,” S&P said.
The forint erased losses after the announcement and traded 0.1 percent stronger at 303.2 versus the euro at 6:18 p.m. in Budapest. It gained 4.4 percent this year, more than European emerging-market currency peers such as the Polish zloty, Romania’s leu or the Czech koruna.
S&P’s upgrade aligned its grade for Hungary with those of Fitch Ratings and Moody’s Investors Service, both of which have Hungary’s sovereign credit one step below investment grade with a stable outlook.
Investors often disregard ratings companies’ credit grade and outlook changes. Hungary’s 10-year government bond yield has plunged to 3.2 percent from 9 percent when S&P downgraded Hungary’s debt to junk in December 2011.
“Hungary is now only one step away from the investment grade category” at all three rating companies, the Economy Ministry said in an e-mailed statement after S&P’s decision. “In the coming months, the Hungarian economy’s performance is expected to lead to rating companies raising their outlook to positive” on Hungarian debt “and eventually further upgrades, placing Hungary in investment grade.”
The economy was one of the fastest growing in the EU last year, expanding 3.6 percent from 2013, and it has shown little sign of slowing. Industrial output rose 7.7 percent in January from a year earlier, according to statistics office data. The expansion is becoming broader as agriculture, tourism and construction bounce back and consumer spending recovers, which helped boost retail sales the most in 11 years in January.
The economy may grow 2.5 percent on average between 2015 and 2017, more than a previous forecast of just above 2 percent, S&P said, adding that Hungary is more likely to exceed its estimate than to come up short. Gross domestic product may grow as much as 3 percent this year and next, Economy Minister Mihaly Varga said on March 18.
“The time is ripe for Hungary to be upgraded,” Varga said at a conference in Budapest on Friday, before S&P published its assessment.
Hungarian consumers have more money to spend as disposable incomes gain from government cuts to household energy bills, $4 billion in refunds from banks for charges courts deemed “unfair” and the conversion of foreign-currency loans to forint. The government is also helping boost debt financing in forint, paring the country’s exposure to swings in the exchange rate and investor risk sentiment.
Economic growth last year helped reduce the level of public debt, still one of the highest in eastern Europe, to 76.9 percent of GDP at the end of 2014 from 77.3 percent in 2013, the central bank said in a statement. Hungary exited the EU’s excessive-deficit procedure for budget offenders in 2013 for the first time since joining the bloc in 2004.
Hungary is on track to reduce its government debt level to “just over 70 percent” of GDP by 2018, S&P predicted.
“Falling external vulnerabilities and the government’s more constructive banking sector policies are likely to drive positive credit ratings action,” Nora Szentivanyi, a London-based economist at JPMorgan Chase & Co., said in an e-mailed report. “Yet a return to investment grade may not materialize before 2016.”