Fitch Ratings affirmed Hungary's junk status on November 20, dashing hopes in Budapest that the country could return to investment grade this year.

Fitch affirmed Hungary's long-term foreign Issuer Default Rating (IDR) at BB+ - one notch below investment grade - saying the rating reflects the country's strong economic outlook and significant current account surplus, which has contributed to a noticeable reduction in external debt. The ratings agency moved its outlook on Hungary to positive on May 22, which had raised hopes of an escape from junk. The outlook remains the same.

The country lost its investment grade at the three major credit rating agencies in 2011 and 2012, as long-winded talks with the IMF on a bailout broke down. The government has spent the time since arguing an escape from junk is due, and has pushed those claims harder over the past couple of years citing stronger than expected growth and falling state debt. Moody's moved its outlook to positive on November 6, bolstering expectation for the scheduled review from Fitch.

However, the analysts wrote that any rating upgrade requires greater policy stability and predictability, along with an improved business environment. In addition, a continued reduction in external indebtedness and a falling government debt ratio could also trigger positive action.

The government debt ratio, GDP per capita, and governance indicators continue to be high relative to rating peers, Fitch notes. A gradual tightening in the budget deficit should help reduce the debt ratio, the rating agency adds.

The rating agency expects Hungary’s budget gap to stay below the EU limit of 3%, helping push state debt down to 72% of GDP by 2017 from 76.2% in 2014. The share of foreign currency debt has fallen to 33% of the total, from 39% at the end of 2012. 

Fitch expects Hungary’s economy to expand by 2.9% in 2015, easing from 3.7% in 2014, driven by high investment and rising household consumption. Growth is forecast to further weaken to 2.3% next year as EU disbursement falls markedly, and to remain at about 2.0% in the medium term as private sector investment gradually recovers.

Supporting a recovery in bank lending has become a key policy priority, Fitch says, adding that the implementation of the deal agreed between Hungary and the EBRD, including a cut in the bank tax from 2016, would support a strengthening in the banking sector and a recovery in bank lending. “It would also be consistent with the government's shift in favour of greater policy predictability towards the private sector," the analysts point out.