Frankfurt am Main, September 25, 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook on the Government of Hungary's ratings
to positive from stable. Moody's has affirmed the long-term
issuer and senior unsecured debt ratings at Baa3, and Hungary's
senior unsecured shelf programme ratings at (P)Baa3.
The key drivers for the change in outlook to positive are the strong recent
and prospective performance of the economy relative to Baa3- and
Baa2-rated peers, with related improvements to the domestic
and external debt position. While strong economic growth and government
debt reduction have inevitably been derailed by the coronavirus crisis,
the impact on Hungary's credit profile has been more limited than
elsewhere. Moody's expects that the improvement in the government's
fiscal and debt metrics seen since the last rating action in November
2018 will resume from 2021, and that the reduction in external vulnerabilities
since 2012 will be sustained.
The Baa3 rating incorporates a number of credit challenges, such
as the strong dependence of the economy on manufacturing and the related
exposure to Germany's (Aaa stable) automotive sector; the fact
that the government debt burden remains above the median of similar-rated
peers; and some weaknesses in the institutions and governance framework,
mainly in relation to civil society, and the at times confrontational
relationship with the European Union (EU, Aaa stable).
In a related rating action, Moody's has today also changed the outlook
on the National Bank of Hungary (MNB) to positive from stable and affirmed
its long-term issuer and senior unsecured shelf programme ratings
at Baa3 and (P)Baa3, respectively. The Government of Hungary
is legally responsible for the payments on MNB's bonds, and MNB's
ratings and outlook are therefore in line with those of the government.
Hungary's long-term foreign-currency bond and deposit ceilings
remain unchanged at Baa1 and Baa3, respectively. The short-term
foreign-currency bond and deposit ceilings remain unchanged at
P-2 and P-3, respectively. Finally, Hungary's
long-term local-currency bond and deposit ceilings also
remain unchanged at Baa1.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO POSITIVE FROM STABLE
Since Moody's last rating action in November 2018, the government
has made further progress in implementing its fiscal consolidation and
debt reduction strategy, supported by sustained strong growth momentum,
with average annual real GDP growth of 5% in 2018 and 2019.
Over the five years to end-2019, general government debt
fell from 76.2% of GDP in 2015 to 66.3% of
GDP.
The coronavirus pandemic has had, and will continue to have,
a significantly negative impact on the Hungarian economy, government
finances and debt metrics. Moody's forecasts a real GDP contraction
of 5.5% in 2020, followed by a recovery in growth
to about 4% in 2021, somewhat slower than the government's
projection of 4.8% growth in its 2021 budget. Government
debt will rise a further ten percentage points to around 76% of
GDP.
However, the impact on Hungary's economic and fiscal strength
is likely to be less marked than elsewhere in the EU and will reverse
over time. The rating agency expects real GDP growth to return
to potential from 2022, averaging around 3.5% for
2022-24, supported by strong investment in the past few years
and the expectation that most large scale foreign direct investment projects
will be implemented.
Moody's expects sustained growth momentum and commitment to continued
fiscal prudence to reverse the rising debt trajectory once again.
While the rating agency forecasts a more gradual reduction in the fiscal
deficit than the authorities, it still expects the deficit to narrow
to 3% of GDP by 2024, from a forecast deficit of 7.3%
of GDP this year. Even under this scenario, Hungary will
again exhibit one of the fastest reductions in government debt-to-GDP
amongst its peer group of Baa2- and Baa3-rated sovereigns,
with the debt ratio returning to its 2019 level by 2024.
RATIONALE FOR AFFIRMING THE RATINGS AT Baa3
The rating affirmation takes into account Hungary's fundamental credit
strengths, the country's structural impediments to growth in the
long-term, some weaknesses in the institutions and governance
framework, and limited exposure to event risks.
Hungary's economic strength is marked by a moderately-sized economy,
reasonably high wealth levels and robust growth dynamics, notwithstanding
the negative impact on the economy particularly in 2020. Longer-term
challenges include structural change in Germany's automotive sector,
which Hungary's manufacturing sector is highly integrated within,
as well as skills mismatches and broader non-cost competitiveness
challenges, which the authorities are aiming to address through
comprehensive competitiveness-enhancing plans, which will
however take time to yield results.
Hungary's institutions and governance framework is characterized
by the relatively high quality of its legislative and executive institutions,
and reasonably strong policy effectiveness. However, in Moody's
view the strength of Hungarian civil society and the judiciary is weaker
than peers'. The at times confrontational relationship with
the EU poses additional concerns, even if it has not yet weakened
the investment and business climate.
While Hungary's government debt burden will remain somewhat higher
than the median of its peer group of Baa2- and Baa3-rated
sovereigns, Moody's expects this gap to narrow from 2021.
Also, Hungary's government debt affordability is reasonably
strong, with interest payments as a share of revenue staying below
the peer group median since 2015. Hungary has managed stable fiscal
deficits of around 2% of GDP between 2015 and 2019, which
marked a significant improvement from deficits averaging 3.7%
of GDP per year in the years 2009 to 2014.
Moody's expects event risks to remain contained. Hungary
has further reduced its external vulnerabilities, with total external
debt at 73.5% of GDP as of end-2019, down from
close to 150% in 2009. The share of foreign-currency
denominated government debt has fallen to 20.5% of the total
at the end of 2019, from more than 50% in 2011; and
the share of non-residents in general government debt has been
reduced to 38.7% in 2019 from 66.1% in 2012.
Together this has significantly lowered Hungary's exposure to global financial
market volatility.
The banking system is sound and Moody's expects overall political
stability over the coming years.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are not material to Hungary's credit
profile, and the country has not been identified as being one of
the sovereigns materially exposed to physical climate change risks,
even if the increased frequency of climate-change related weather
events such as droughts and floods will pose challenges over time.
Moody's regards the coronavirus outbreak as a social risk under
its ESG framework, given substantial implications for public health
and safety. However, while the crisis will lead to a temporary
reversal of Hungary's otherwise improving credit metrics, it is
unlikely to derail the underlying improvements supporting the positive
outlook.
More material to Hungary's credit profile are long-term social
considerations predominantly centered around the fiscal impact of relatively
fast population ageing. While the European Commission identifies
ageing as a medium/long-term fiscal sustainability risk for Hungary,
previous pension reforms contribute to a broadly stable share of total
ageing-related costs as a share of GDP over the coming decades.
Governance considerations form an integral part of our credit analysis
for Hungary and are material to the credit profile. Longstanding
concerns relate to the control of corruption, as well as issues
concerning transparency in public procurement, central bank independence
and monetary financing, as well as the difficult and at times confrontational
relationship with the EU.
GDP per capita (PPP basis, US$): 34,046 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.9% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.1%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -2%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.3% (2019 Actual)
(also known as External Balance)
External debt/GDP: 73.5% (2019 Actual)
Economic resiliency: baa1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 22 September 2020, a rating committee was called to discuss the
rating of the Government of Hungary. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have improved. The issuer's institutions
and governance strength, have not materially changed. The
issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed. The coronavirus pandemic will
have a significant but temporary effect on Hungary's economic performance;
fiscal consolidation and declining debt burden will likely resume from
2021 onwards.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATING UP
Upward pressure on the rating would materialize if Hungary's economic
metrics were to recover quickly from the crisis as expected and if that
and policy action were to reverse the rising debt trajectory once again.
Over time, the sustainable reduction in the public debt burden closer
to the median of similarly rated peers would imply further upward pressure
on the rating. Implementation of further structural reforms under
the government's "Program for a More Competitive Hungary"
and along the points outlined in the MNB's competitiveness programme
aimed at improving non-cost competitiveness, which help to
boost potential growth in the economy, would also be credit positive
over the longer-term.
WHAT COULD CHANGE THE RATING DOWN
The outlook would return to stable, or downward rating pressure
could arise if there were signs of a (post-pandemic) weakened commitment
by policymakers to contain the budget deficit and achieve primary surpluses
to ensure a continued reduction in the debt burden. In addition,
the introduction of policy measures that would weaken the economic growth
outlook, which in turn endangers the downward trajectory of the
government's debt ratio, would also be negative.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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.
Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
