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Rating Action:

Moody's affirms Hungary's Ba1 government bond rating; outlook remains negative

Global Credit Research - 08 Feb 2013

London, 08 February 2013 -- -- Moody's Investors Service has today affirmed Hungary's Ba1 government bond rating and maintained the negative outlook.

Today's action - both the affirmation and the maintenance of the negative outlook - reflects the combination of the following credit drivers for Hungary:

(1) Some reduction in the general government debt ratio in 2012 and the expectation that the debt ratio will stabilise in 2013 to levels somewhat closer although still higher to similar rated peers. The progress achieved last year reflects the government's commitment to contain the fiscal deficit to below 3% of GDP in 2012 and which we anticipate will be maintained in 2013.

(2) While some progress is being made on the deficit and debt metrics, policy measures continue to have a negative impact on the economy's medium-term growth outlook. The economy is in a weaker state and Moody's believes that the weak growth outlook continues to raise concerns on the ability of the government to place the general government debt trend on a sustainable downward path.

(3) Ongoing uncertainty associated with the economy's ability to withstand external shocks or adverse domestic developments, against the backdrop of substantial financing needs and potential volatility in financial markets.

Moody's also affirmed the Ba1 foreign-currency debt rating and maintained the negative outlook on the National Bank of Hungary (NBH). The Government of Hungary is legally responsible for the payments on NBH's bonds.

RATINGS RATIONALE

The first credit driver for today's action recognizes some reduction in the general government debt ratio in 2012 and the expectation that the debt ratio will stabilise in 2013 to levels somewhat closer although still higher than similarly rated peers. The progress achieved last year reflects the government's commitment to contain the fiscal deficit to below 3% of GDP in 2012 and which we anticipate will be maintained in 2013. Moody's estimates a fiscal deficit of 2.7% of GDP in 2012 and expects the government to maintain the deficit below 3% of GDP in 2013, even if it were to require further fiscal measures. Moody's also notes that the government financed a large gross borrowing requirement in 2012 through domestic bond issuance, which reflects a mature government bond market. Nevertheless, strong participation by non-resident investors -- who as of November 2012 hold around 46% of central government domestic securities (excluding short-term treasury bills) -- exposes the economy to a potential deterioration in investor confidence.

Despite some progress on the deficit and debt metrics, policy measures continue to have a negative impact on the economy's medium-term growth outlook. The economy has weakened significantly since the last rating action in November 2011 and Moody's estimates that the economy contracted by around 1.4% in 2012 and forecasts a very weak growth of 0.3% in 2013. Particularly problematic for the growth and competitiveness outlook is the country's weaker investment climate, which has been aggravated in recent years by the distortionary corporate taxes on selected sectors, specifically on the banking, energy, retail and telecommunications sectors. This is reflected in the continued decline in gross fixed capital formation -- estimated to have contracted by 5% in real terms in 2012 (the fourth consecutive year). The predominantly foreign-owned banking system, which has been significantly weakened by the fragile operating environment, is also unable to support economic growth. Moreover, lacklustre European growth has had an impact on Hungary through the trade channel where the economy's high dependence on the EU markets (which receives 76% of Hungary's exports) has slowed export growth. As a result, Moody's expects the medium-term growth outlook for Hungary to be significantly lower than that of other economies in Central and Eastern Europe (CEE). This constrains the governments' ability to place the debt trend on a permanent downward path.

The third credit driver that underscores Moody's decision to maintain the negative outlook is the ongoing uncertainty associated with the economy's ability to withstand external shocks or adverse domestic policy actions, against the backdrop of substantial financing needs and potential volatility in financial markets. At an estimated 19% of GDP, Hungary's financing needs in 2013 are the largest amongst its CEE peers. Although Moody's expects that the government will maintain a deficit below 3% of GDP in 2013, there are several headwinds with regard to the fiscal outlook. Of note, there is a risk that electoral considerations may take precedence, while a greater than anticipated deceleration in growth may result in fiscal slippage in the next 12-18 months, which in turn could lead to a punitive market response. Moreover, as mentioned above, the dominant proportion of foreign-currency and non-resident investors in the general government debt mix heightens risks emanating from exchange-rate pressures and investor confidence due to international volatility or potential domestic developments.

FOREIGN AND LOCAL-CURRENCY CEILINGS

Moody's has today adjusted Hungary's long-term local-currency bond and deposit ceilings to Baa2 from A2, the long-term foreign-currency bond ceiling to Baa2 from A3 to better capture the country's external vulnerability risk and the default correlation between the government and private-sector borrowers. The short term foreign currency ceiling was affirmed at P-2, and the long-term and short-term foreign currency bank deposit ceilings were also affirmed at Ba2 and Not Prime (NP), respectively.

WHAT COULD CHANGE THE RATING -- DOWN/UP

Downward pressure on the government bond rating could arise if there is a reduction in the Hungarian policymakers' commitment to contain the budget deficit to below 3% of GDP and/or if further government measures were to significantly undermine the economic growth path more severely than what is anticipated, by triggering exchange-rate pressures, capital outflows and rising financing costs. Conversely, Moody's would consider stabilising the outlook on the government's Ba1 bond rating if the country were to exhibit more predictability in its policy framework that would support robust economic growth over the medium term. This in turn would facilitate placing the debt trend on a sustainable downward path.

RATINGS RATIONALE

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alpona Banerji
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Hungary's Ba1 government bond rating; outlook remains negative
No Related Data.

 

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