In its second scheduled review of the year, Fitch affirmed Hungary's sovereign credit rating at BBB- with a positive outlook on August 31. The decision comes as a disappointment to Hungarian policymakers, who expected an upgrade.

"Hungary's ratings balance strong structural indicators compared with BBB peers against higher public and net external debt, and risks from policy unpredictability and pro-cyclical fiscal policies," Fitch said. The positive outlook indicates the improving trend in net external and government debt, it added.

Fitch said Hungary's current account balance "compares favourably" with the current BBB median of -1.9% of GDP. It forecast the surplus would reach 2.3% of GDP in 2018, albeit somewhat lower than the 3.1% in 2017, and average 1.9% of GDP in 2019-2020.

Net external debt increased to 18.6% of GDP at the end of 2017, but Fitch expects it to decline to an estimated 13.7% in 2018 and 5% in 2020, broadly in line with the current peer median of 6%. 

The positive outlook indicates the improving trend on net external and government debt, it added. 

Fitch expects Hungary’s current account surplus to drop to 2.3% of the GDP this year from 3.1% in the previous year. Net external debt increased to 18.6% of GDP at the end of 2017, but Fitch expects it to decline to an estimated 13.7% in 2018 and 5% in 2020, broadly in line with the current peer median of 6%.

The rating agency noted that the structure of Hungary's public debt is "improving and favourable" with only 20% denominated in foreign currency and about 32% held by non-residents.

Fitch said Hungary's general government debt levels, as a percentage of GDP, are nearly double the medial level of countries with BBB rating. Fitch forecasts the level will fall from 73.6% of GDP in 2017 to 71.7% in 2018, 70.2% in 2019, and 68.7% in 2020, supported by continuing primary surpluses. 

Fitch forecasts the budget deficit will rise from 2% of GDP in 2017 to 2.4% in 2018, in line with the government's target. Hungary outperforms its BBB rated peers on the World Bank governance indicators as well as ease of doing business, it added.

Fitch said the main factors that could lead to an upgrade are a continued reduction in external indebtedness and improved external liquidity supported by current account surpluses.

As in the previous review by S&P earlier this month, Hungary’s central bank, the Magyar Nemzeti Bank (MNB) said Hungary was fit for an upgrade now. 

"The credit rating agency may wait for indicators to stabilise at favourable levels and for a consolidation in the global investor environment before an upgrade," the MNB said, adding that it continues to expect an upgrade in future.

Hungary had shown marked improvements in two areas of key importance to Fitch's assessment: the country's external balance and its rate of economic growth.

Credit rating agencies are still keeping Hungary’s rating on hold despite stable economic growth and the low budget deficit, K&H Bank analyst David Nemeth said. Despite the decline in state debt it still remains elevated compared to BBB peers, he added.