Fitch affirms Hungary ‘BBB’ rating; outlook ‘stable’

“Hungaryʼs ‘BBB’ rating balances strong structural indicators and stronger and more stable macroeconomic performance than peers against high general government debt and risks from policy unpredictability and pro-cyclical policies,” Fitch said.

The credit ratings agency noted a deceleration in GDP growth in the second quarter, but described economic growth as “still robust, with little evidence of macroeconomic imbalances.” It said it expects growth to slow to 4.4% in 2019, 3.5% in 2020, and 2.5% in 2021.

Fitch said it has revised its forecast for Hungaryʼs 2019 general government deficit to 1.8% of GDP, in line with the governmentʼs target, and forecasts deficits of 1.8% of GDP in 2020, and 2.0% of GDP in 2021.

Fitch added that it expects fiscal policy to be tightened, despite slowing economic growth, as the government seeks to make progress towards the countryʼs medium-term objective of a structural deficit of 1% of GDP from 2020. Fitch noted that family support measures the government announced early in 2019 pose “modest downside risks” to its projections.

Although Hungaryʼs state debt, at 70.1% of GDP in Q1 2019, remains well over the current peer median of 39.4%, Fitch said the structure of that debt is becoming more favorable, with 63.3% held by domestic residents as of Q2 2019.

Tight labor market, deteriorating EU relations

Hungaryʼs labor market is tight and wage growth is among the highest in Central and Eastern Europe, Fitch observed. Hungarian authorities estimate wage growth is far above productivity gains, but Fitch noted that companies have absorbed rising labor costs and remained competitive, showing robust profit growth.

Fitch acknowledged strong credit growth in the banking sector in recent years, but said private sector borrowing is still relatively low, at 33.3% of GDP as of 2018.

Fitch said Hungaryʼs governance indicators “are above peer medians and have largely remained stable in recent years,” but added that the governmentʼs relations with the EU have deteriorated in recent years.

Fitch said the main factors that could lead to a positive rating action are a sustained decline in Hungaryʼs state debt relative to GDP, “increased confidence in the macroeconomic policy framework over the economic cycle,” and an “improved business environment that would support stronger GDP growth without the emergence of macroeconomic imbalances.”

Factors that could lead to a negative rating action Fitch cited include any “deterioration in the policy framework that could pose risks to macroeconomic stability,” “worsening of fiscal metrics that could lead to adverse debt dynamics,” and “weakening of the institutional framework that leads to a deterioration in governance indicators.”