Hungary Regains Investment Grade at S&P on Budget Discipline

Updated on
  • Upgrade reflects “stronger economic performance,” S&P says
  • Forint jumps to highest against euro in more than six months

Hungary regained its investment grade at S&P Global Ratings after almost five years as economic growth rebounded and the government’s budget discipline bolstered public finances. The forint jumped to the highest against the euro in more than six months.

S&P lifted Hungary’s sovereign credit to BBB-, the lowest investment grade, from BB+, according to a statement on Friday. The outlook is stable. Fitch Ratings returned Hungary’s investment grade in May, while Moody’s Investors Service assigns the sovereign its highest junk grade with a positive outlook.

“The upgrade reflects stronger economic performance” as well as “the marked improvement in Hungary’s external financial profile” and the “immunization of the sovereign debt profile from foreign-currency volatility,” S&P primary credit analyst Aarti Sakhuja in Madrid said in the statement.

Hungary, which needed an an International Monetary Fund-led bailout in 2008 to avoid default, has turned the corner in public finances by keeping the budget deficit below the European Union limit of 3 percent of gross domestic product. Prime Minister Viktor Orban’s government has also moved aggressively to cut the economy’s vulnerability to exchange-rate swings by converting household Swiss franc-based mortgages to forint last year and by mostly relying on local debt sales to finance the deficit.

The forint strengthened as much as 0.7 percent against the euro to 307.71 after the upgrade. It traded at 308.14 per euro at 5:45 p.m. in Budapest. The yield on the 10-year government bond dropped 7 basis points to 2.95 percent. The central bank has cut the benchmark interest rate to a record low 0.9 percent to weaken the forint and has pledged to use unconventional policy from September to continue easing monetary conditions.

“Policy makers will likely feel vindicated in regaining the investment grade crown from S&P and pleased with the boost to local rates and bond markets,” Phoenix Kalen, a London-based strategist at Societe Generale SA, said by e-mail. “However, they’ll likely not be too enthused about the strengthening currency, which they have been fighting against.”

The share of foreign denominations in Hungary’s government debt will fall to 26 percent by year-end from 52 percent in 2011, Gyorgy Barcza, the head of the nation’s debt management agency, told the newspaper Magyar Idok in an interview published Sept. 12. Government debt was 75.5 percent of GDP at the end of June, compared with 78.8 percent a year earlier, according to central bank data. Economic growth accelerated to 2.6 percent in the second quarter from a year earlier from 1.1 percent in January-March.

Budget Outlook

Hungary’s budget gap may narrow to 1.8 percent of GDP this year from 2 percent in 2015, while economic growth may average 2.5 percent through 2019, S&P said.

The upgrade by S&P, which stripped Hungary of its investment grade in late 2011, is the latest signpost of the $120 billion economy’s recovery. Recessions in 2009 and 2012-2013 were accompanied by government measures seen as unfriendly to investors, which contributed to the sovereign being pushed to junk status at all three major ratings companies.

Orban followed a landslide election victory in 2010 with steps including the nationalization of $11 billion of private pension assets and the introduction of Europe’s highest bank tax, saying the moves were needed to wean Hungary off international financing and to bolster public finances.

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 market-friendly measures such as a cut in the bank tax helped cut borrowing costs to below 3 percent on Friday.

“You won’t see a direct move in the bonds because people were positioned for this but as we move into next week there is likely to be some positive spillover,” said Simon Quijano-Evans, an emerging-market strategist at Legal & General Group Plc in London. “More investors will jump on the bandwagon given you have double investment grade there now.”