Dagong Maintains the Sovereign Credit Ratings of Hungary at BBB and BBB- with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
April 26, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of Hungary at BBB and BBB-, each with a stable outlook. The debt repayment environment of Hungary is stable while effective reforms contribute to economic growth at a relatively high rate. Government debt is falling steadily and external vulnerabilities are witnessing visible improvements, thus government solvency in local and foreign currency is bolstered.
The key reasons for maintaining the sovereign credit ratings of Hungary are laid out below:
First, a stable repayment environment assures economic growth. In April 2018, the governing coalition scored a landslide victory in the congressional election, which provided a political guarantee for the Orbán government to continue its nationalist economic policies. Tangible results have been produced thanks to the government’s consistent policies to improve the country’s business environment, develop competitive manufacturing, as well as creating additional job opportunities, which will continue enhancing Hungary’s economic vitality. In the meantime, ongoing economic pickup and the writing off of bad debts are both resulting in much lower non-performing loans amongst Hungarian banks, while the country’s accommodative monetary policy leads to steady credit growth, thereby supporting the real economy.
Second, investment and consumption will boost Hungary’s economic growth in the short term, whereas the country faces challenges in the medium and long term. Given the measures to reduce corporate and individual tax burden, as well as an accommodative monetary policy, in 2017 the Hungarian economy registered a growth rate as high as 4.0%. In the near term, despite muted investment, Hungary will grow at a rate of 3.9% in 2018 and 3.7% in 2019, driven by consumption and external demand. In the medium and long term, Hungary will enjoy an advantage in labor costs and geographical location, as well as its industrial base. However, economic growth will be constrained by low labor productivity and the outflow of technicians, amongst other issues, thus it is forecasted that Hungary’s economic growth will average 3.2% over this period.
Third, an expansionary fiscal policy turns the country’s primary fiscal surplus into a small deficit, yet repayment resources remain secure. In the short term, owing to government policies intending to slash income and value-added tax, as well as increasing subsidies for large enterprises, it is projected that in 2018 and 2019 the Hungarian general government’s primary fiscal deficit will be 0.2% and 0.1% while the ratio of financing needs to fiscal revenues at the same period is 35.6% and 34.9%, respectively. Nevertheless, comparatively low financing costs and proper financing channels can maintain stable repayment sources.
Fourth, government solvency remains sound. Considering relatively rapid growth and comparatively low financing costs, in 2017 the ratio of Hungarian general government debt to fiscal revenues declined to 149.4% while it is expected that in 2018 and 2019 that ratio falls to 144.5% and 144.1%, respectively, thus government debt is decreasing and local-currency solvency is stable. In the short term, rising energy prices and robust domestic demand will bolster imports, thus the current account surplus will narrow. However, given the country’s nationalist economic policies, a stronger capacity for domestic production and supply enables Hungary to sustain its trade surplus. Additionally, external debt is on the decline from a high level, so external vulnerabilities improve noticeably, and sufficient foreign exchange reserves can cover external financing needs. Therefore, government solvency in foreign currency remains stable.
In the short term, strong domestic demand allows Hungary to attain relatively high growth and newly-added tax revenues are likely to compensate for losses stemming from tax measures, thus the government debt burden will sustain a downward trend. That, coupled with continuing current account surplus and relatively sufficient foreign exchange reserves, renders government solvency stable. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Hungary.