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Rating Action:

Moody's changes outlook on Hungary's Ba1 ratings to positive, affirms ratings

06 Nov 2015

London, 06 November 2015 -- Moody's Investors Service (Moody's) has today changed the outlook on the Ba1 government bond rating of Hungary to positive from stable. Concurrently, Moody's has affirmed Hungary's Ba1 rating.

The key drivers for the outlook change are:

- Moody's view that the downward trend in the government debt stock will likely be sustained in the coming years. This assessment is based on (1) the government's strong commitment to limit the budget deficit and maintain primary surpluses and its proven track record to deliver on this commitment, and (2) the declining share of foreign-currency liabilities in the government's debt stock, which renders it less susceptible to exchange rate shocks than in the past.

- The improving economic outlook, as the Hungarian economy's external vulnerability has been greatly reduced through the resolution of the foreign-currency debt overhang of both households and the banking sector. This in turn should have a positive impact on domestic demand. Moody's also believes that greater policy stability, in particular with regards to the banking sector, should help revive bank lending and support economic growth prospects.

Concurrently, Moody's also affirmed the Ba1 rating for the National Bank of Hungary (NBH) and changed the outlook to positive from stable, as Hungary's government is legally responsible for the payments on NBH's bonds.

Hungary's long-term local-currency bond and deposit ceilings remain at Baa2. The long-term foreign-currency bond ceiling and short-term foreign currency bond ceiling remain at Baa2 and P-2, respectively. The long-term and short-term foreign currency bank deposit ceilings remain at Ba2 and Not Prime (NP), respectively.

RATINGS RATIONALE

RATIONALE FOR OUTLOOK CHANGE

--- FIRST DRIVER: DOWNWARD TREND IN GOVERNMENT DEBT RATIO WILL BE SUSTAINED

Moody's expects the government debt ratio to decline to 74.3% of GDP this year and further to below 73% in 2016. This compares to a peak of 81% in 2011. In the rating agency's view, this downward trend is more robust than in the past, because the government has shown its ability and strong commitment to restrict the headline budget deficit to below 3% of GDP and maintain primary surpluses on a consistent basis since 2012. This year, higher-than-expected tax revenues are likely to reduce the budget deficit below the target of 2.4% of GDP. The 2016 budget targets a deficit of 2% of GDP, which Moody's considers to be attainable. The primary balance will remain in surplus of above 1% of GDP, ensuring a declining debt trend.

In addition, the government's debt stock is less vulnerable than in the past to exchange-rate fluctuations, with around 34% of the stock being denominated in foreign currencies, compared to a peak of around 50% in 2011. Moody's expects the foreign-currency share to decline further next year, probably to around 30% or even lower, given the ongoing steps undertaken by the government and central bank to refinance maturing foreign-currency debt with HUF-denominated bonds and to encourage the domestic banking sector as well as retail investors to invest in HUF-denominated government bonds. A foreign-currency share of around 30% in total government debt would be lower than many Baa-rated emerging market peers. We also note positively that Hungary has not been affected by exchange rate volatility during recent emerging market stress periods, in contrast to earlier such episodes.

--- SECOND DRIVER: GOOD GROWTH PROSPECTS CAN BE MAINTAINED

Moody's also believes that Hungary's recent positive economic growth performance can be sustained in the coming years. This assessment is based to an important extent on Moody's view that the resilience of the Hungarian economy has been materially strengthened through the completion of the foreign-currency loan conversion programme earlier this year. Households' foreign-currency debt has been almost completely transformed into domestic liabilities, which in turn should provide support for private consumption. For the banking sector, the reduction in foreign-currency exposure is also material and Moody's expects that the improved asset quality will allow the banks to return to lending to the real economy. Moreover, the banking sector benefits from greater policy stability, with the bank tax being reduced from next year onwards. In addition, the government has committed to reduce the state's involvement in the sector and refrain from any measures that would be detrimental to the sector.

Greater policy stability is also visible in the fiscal policy area. The government has approved its 2016 budget already in June 2015, in order to provide a high degree of clarity and predictability over tax and spending policies and to enshrine the cut in the bank tax. In the past, drastic changes in economic policies have negatively affected confidence, bank lending, investment and ultimately economic growth. Moody's believes that going forward real GDP growth rates of 2-2.5% can be sustained.

RATIONALE FOR AFFIRMING THE Ba1 RATING

Despite the recent positive developments and Moody's expectations that Hungary's key credit metrics will continue to improve, the public debt ratio is significantly higher than most peers at the Baa3 rating level and will likely decline only gradually in the coming years. In the meantime, the Hungarian government has very large borrowing requirements, exposing it to higher refinancing risks than many higher rated peers. Hungary's gross borrowing requirements stand at around 20% of GDP per year compared to Baa3-rated emerging market peers, which typically have borrowing needs of 5-10% of GDP.

WHAT COULD MOVE THE RATING UP/DOWN

Moody's would consider upgrading Hungary's rating if the country's economic and fiscal metrics continued to improve, resulting in a further reduction of the public debt ratio. In particular, an upgrade would be dependent on further confirmation that economic policy-making is more stable than in the past, in turn supporting sustained economic growth, fiscal consolidation and a further reduction of external vulnerabilities.

Conversely, downward pressure on the government's bond rating could arise following (1) signs of a weakened commitment by policymakers to contain the budget deficit to less than 3% of GDP; and/or (2) the introduction of policy measures that would negatively impact the economic growth outlook, which in turn would endanger the downward trajectory of the government's debt ratio.

GDP per capita (PPP basis, US$): 25,019 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.7% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.9% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -2.5% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 2.3% (2014 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 03 November 2015, a rating committee was called to discuss the rating of the Hungary, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have increased. The issuer's fiscal or financial strength, including its debt profile, has increased. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy 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 rating action, if applicable.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Kathrin Muehlbronner
Senior Vice President
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

Yves Lemay
MD-Banking & Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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 changes outlook on Hungary's Ba1 ratings to positive, affirms ratings
No Related Data.
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