Hungary eyes escape from junk

By bne IntelliNews June 4, 2014

Tim Gosling in Prague -


Fitch is set to review its rating on Hungary's sovereign debt on June 6, raising the possibility that the country could finally win an upgrade back to investment status, according to the central bank. 

In line with EU regulations, Fitch has published its schedule of sovereign debt rating reviews for the year. It shows that the first review of Hungary's rating is to take place on June 6, reports A second review is due on November 28. 

The agency currently rates Hungary one notch below investment grade at BB+ with a stable outlook. A central bank official claimed last week that the country is due an upgrade this year following talks with one of the three major ratings agencies, although refused to name which one.

Standard & Poors and Moody's both also have Hungarian long term debt rated as "junk". The trio moved to strip the country of its investment grade ratings during a matter of weeks in late 2011 and early 2012, as the government dropped talks with the International Monetary Fund and EU over a loan. 

Fitch was the last to join the junk club, having rated Hungary investment grade since 1996. However, it said in January 2012: "The downgrade of Hungary's ratings reflects further deterioration in the country's fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence." 

S&P has since knocked Hungary down another notch, with Prime Minister Viktor Orban and other senior officials complaining the downgrades are part of a market conspiracy. Those objections were led by then economy minister Gyorgy Matolcsy, who now leads the Magyar Nemzeti Bank (MNB).

However, with the economy starting to show signs of recovery last year, Budapest has seen strong demand for its bonds, despite the limitations that junk status places on buyers. Many institutional investors need an investment grade from two of the three agencies on an asset.

Recovering investment grade would also likely be heralded by Orban as an admission that his policies - which have included increasing state control in "strategic" sectors and high taxes on the banks and other large foreign investors - are working. While data shows growth accelerating over the past 12 months as Hungary climbs out of crisis, many suggest the recovery will be short lived due to a lack of new investment. 

With the banks under particular pressure, the central bank is supplying most of the credit being lent in the country right now. Little wonder then that the MNB - now run by close confidantes of Orban - are keen to talk of an upgrade.  

Executive Director Daniel Palotai said on May 29 that recent talks with one of the agencies during its scheduled review of Hungary showed that the rating firm recognized that the Hungarian economy is now less vulnerable than before. Palotai did not name the agency, but said he expects a rating upgrade in 2014. "[...] it would be difficult to find arguments against a positive rating move," he added.

Should Fitch disappoint, Budapest will soon have another opportunity. Moody's is due to review its rating on Hungary on July 4 - with a second set for November 7. S&P will next return to its rating on September 19, after upgrading its outlook to 'Stable' from 'Negative' in late March.


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