Standard & Poor’s has affirmed Hungary’s BB/B long- and short-term sovereign credit ratings keeping a negative outlook reflecting expectations there is at least one-in-three possibility for cutting the ratings over the next year if economic recovery weakens significantly, if banks accelerate their withdrawal of credit, or if external or government finances materially weaken, the ratings agency said in a statement.
Hungary's ratings are supported by the economy's well-diversified economic and export structures that ensure a relatively stable tax base but the weak growth prospects, limited monetary flexibility and the high external debt are constraining the country's creditworthiness, S&P said.
The agency considers Hungary’s growth prospects to be weaker compared to peers and GDP is projected at 1.3% on average between 2013 and 2015. This reflects likely continued financial-sector impairment, as well as expectations for moderate net foreign direct investment inflows and weak private sector employment growth.
The government is expected to meet its objective of keeping fiscal deficits, calculated under accruals-based European (ESA 95) methodology, below 3% of GDP over 2013-2015. Hungary has made progress in fiscal consolidation since 2011 thanks to efforts mostly on the revenue side, S&P said. At the same time, the expenditures have been contained at around 50% of GDP for 2013, which according to S&P is high compared to most of the rated middle-income sovereigns. Spending will not decrease in 2014 either. Consequently, S&P do view net general government debt to GDP as trending permanently downward. Moreover, due to the relatively high share (40%) of the foreign currency component of the general government debt, the debt burden is highly sensitive to exchange rate fluctuations.
According to S&P, Hungary's monetary flexibility is relatively limited reflecting the high euroization of its financial sector and the sensitivity of inflation to the exchange rate channel.
The agency said that it would revise the outlook to stable if it sees the government using its strong majority in parliament to establish policies that encourage investment, while implementing its structural reform programme. In addition, sustained reduction in the country's net external liability position, even as economic growth strengthens could also contribute for an upward revision of the ratings.
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