Moody’s completes Hungary's escape from "junk"

Moody’s completes Hungary's escape from
By bne IntelliNews November 6, 2016

Moody’s Investors Service upgraded Hungary’s credit rating by one notch to “Baa3” from “Ba1” on November 4. The move completes the country’s return to investment grade after close to five years in "junk". The outlook on the rating is stable.

Moody’s was widely expected to follow in the steps of Fitch and S&P, which both upgraded the sovereign earlier this year. The upgrade has long been priced in by the market, thus asset valuations are unlikely to gain significantly. However, Hungary could celebrate the decision with a return to international markets in the coming months, after an absence of over 2.5 years.

Similar to S&P’s decision in September, Moody’s appears untroubled by suggestions from Budapest that it will relax its efforts to reduce the deficit next year, due to concern over slowing growth. Hungary also continues to struggle to significantly cut state debt, although it has made huge cuts in the level of external risk within its borrowings.

“The government debt burden, which now benefits from a lower share of foreign currency denominated debt, will continue to gradually decline,” Moody’s noted in a statement. It also points out that the reduction of external vulnerability improves the resilience of Hungary's credit profile to future external shocks. The rating agency expects that structural economic improvements will help sustain GDP growth rates of 2-2.5% in coming years.

Moody’s also appears relaxed about political risks, despite recent scandals over the central bank’s spending and worries over the independence of institutions. The reduction of the punitive tax on the banking sector, and a wider peace deal, between the government and lenders, has been a major element in the upgrades.

“Moody's expects the greater predictability in policy making seen in the last couple of years will be sustained, resulting in a more stable, growth-friendly policy environment in Hungary than in the past,” Moody's, which is viewed as the most sensitive to issues in the banking sector of the three major rating agencies, wrote.

At the same time, Moody's predicts Hungary will continue to lag its Baa-rated peers in areas such as debt. The country's limited capacity to attract new foreign direct investment also remains a challenge, reflecting weaknesses in Hungary's non-cost competitiveness.

Economy Minister Mihaly Varga welcomed the upgrade at a press conference on November 5. But he also cautioned that the effects “should not be overestimated, as the markets already started treating Hungary [as investment grade],” according to HVG. The official, who has long insisted Hungary was due an escape from "junk" added: “the rating agencies only followed the process”.

The bond market has long been “fully pricing the upgrade”, analysts at RBI noted ahead of the announcement from Moody's. “We would not expect any upside from possible Moody’s action," they wrote. "Rather contrary, we would not rule out a small profit taking in the aftermath of likely positive decision.”

Considering the upgrade, the government is planning to make a final decision on the possible cancellation of its controversial residency bond program. Talking about a possible return to international markets, Varga said that forex issuance “is not planned in the near future,” but added that considering the improving interest rate environment, “the improvement of the FX debt structure is imaginable through issuances with more favourable conditions,” MTI reported.