Fitch Ratings returned Hungary to investment grade as it upgraded the sovereign to BBB- from BB+ with a stable outlook on May 20. The somewhat surprising move saw Fitch become the first of the three major ratings agency to offer the country an escape after close to five years in 'junk'.

The upgrade from Fitch, which until recently had been the overwhelming bet, is likely to offer some recovery from recent pressure on yields and the forint, which grew in recent weeks as expectation grew that another disappointment was on the way. Although Fitch’s lead analyst for the country had said there was “definitely hope” for an upgrade in 2016, analysts had recently become less confident about Hungary’s escape from five years in ‘junk’ due to an increase in state debt, together with a recent loosening of fiscal policy, weak first quarter growth and a scandal at the central bank.

Nevertheless, Fitch said in a statement that “tighter fiscal policy has been consistent with a gradual decline in government debt from a high level”, while the government deficit narrowed to 1.9% of GDP in 2015 from 2.3% in 2014. The banking sector's situation has also improved, the rating agency noted, referring to a cut in Hungary's high tax on lenders at the start of the year.

While the analysts noted the raised target for the deficit - moving from 2% this year to 2.4% in 2017, a year ahead of elections - they also pointed out that Hungary's external vulnerability has vastly reduced over the past few years. While the Fidesz government has struggled to quash overall state debt, it has worked tirelessly to reduce the ratio of external debt.

“The combination of high current account surpluses, high EU fund inflows, banks' external deleveraging, the self-financing programme [of the Magyar Nemzeti Bank, which aims to reduce the country’s external vulnerability] and foreign currency mortgage conversion have contributed to a sharp improvement in Hungary's external balance sheet and reduction in vulnerability,” Fitch said in a statement, explaining the key rating drivers.

The agency also forecasts that “government debt will slowly decline in the medium term” and noted that “the cut in bank tax from 2016 illustrated the authorities' commitment to improve the operational environment”, and no new “adverse bank legislation” is likely to be introduced.

The return of the more cautious investor class, however, would largely have to wait for a second upgrade. Moody’s, which moved to a positive outlook in November, is scheduled to review the sovereign on July 8; Standard & Poor’s, which has a stable outlook on a rating that keeps Hungary two notches into junk and offered a surprisingly stern view in March, will take another look in September.

Economy Minister Mihaly Varga said on May 21 that he expects an upgrade from the two other rating agencies this year, as they “more or less move together”, MTI reports. As a result of Fitch’s upgrade, "we expect a further reduction in yields,” Varga said, adding that with a second investment grade rating, “debt financing may be about HUF40-60bn (€127-190mn) lower in the next 1-1.5 years”.