S&P surprises as it hands Hungary a second escape from junk status

S&P surprises as it hands Hungary a second escape from junk status
The forint jumped on the back of S&P's upgrade, but is unlikely to maintain the momentum.
By Tim Gosling in Prague September 19, 2016

Standard & Poor’s surprised on September 16 as it upgraded Hungary’s credit rating one notch to ‘BBB-’ from ‘BB+’, handing the country an important second investment grade, However, aside from an expected short-term fillip, asset valuations are unlikely to gain significantly, as the action had been priced in by the market for some time.

Hungary has been chasing a second investment grade since Fitch Ratings handed it a first escape in May, after close to five years in junk status. Moody’s Investors Service, which currently has Hungary one notch into junk with a positive outlook, is due to review the sovereign on November 4. All three of the major agencies withdrew Hungary’s investment grade in 2011-12 as Budapest played a game of chicken with the EU and International Monetary Fund (IMF) over an international bailout. S&P says the upgrade is based on the country’s improving fiscal position, reduced external risk and strong growth expectations.

That is the crux of the surprise. It appears S&P now disregards 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 is driving down the level of external risk within its borrowings.

“Hungary’s fiscal, external, and GDP outcomes have improved markedly since 2008,” S&P wrote in a statement. “We now expect GDP growth to average 2.5% over 2016-2019 (versus our previous forecast of 2.0%), while government debt and gross external financing needs decline further.”

While the ruling Fidesz party has indeed worked hard to improve the country’s fiscal standing since it came to power in 2010, the situation has not changed significantly over the past couple of years. In fact, S&P’s head for EMEA said in June that the agency was unlikely to offer an upgrade this month.

“We had not expected this, as S&P did not carry a positive outlook on Hungary, and in fact refused to upgrade the outlook as recently as in March,” note analysts at Commerzbank.

S&P also appears more relaxed about political risk, despite Prime Minister Viktor Orban’s continued efforts to increase his grip on power and several scandals at the central bank in recent months over its spending of public money and connections to the government. In January, the agency downgraded Poland citing such issues, although even now it still rates Hungary two notches below its Visegrad peer.

The upgrade saw the forint jump to HUF307.71 to the euro, its highest in more than six months, reports Bloomberg. However, it’s thought unlikely that the boost for the currency will prove prolonged – which will please the Magyar Nemzeti Bank – or that yields on Hungarian debt will drop significantly. The market has been pricing in a second investment grade – which is required by many of the world’s larger institutional investors in order to buy sovereign bonds – since last year.

“The broader development does not come as a surprise to us,” insist the Commerzbank analysts. “We had been expecting at least two agencies to upgrade Hungary before the end of the year. The bad news is that Hungarian valuations suggest that this had been discounted by the market as well.” That’s a similar situation to the one Hungary faced ahead of the Fitch review in May.

Indeed, as analysts at OTP Bank suggested to bne IntelliNews earlier this year, while the upgrade is likely to attract some of the more risk adverse, it could also be a signal to investors hunting higher yields to cash out.