London, 24 November 2011 -- Moody's Investors Service has today downgraded Hungary's government bond
rating by one notch to Ba1 from Baa3, and is maintaining a negative
outlook.
The key drivers for the downgrade and negative outlook are as follows:
1.) The rising uncertainty surrounding the country's ability
to meet its medium-term targets for fiscal consolidation and public
sector debt reduction, particularly given Hungary's increasingly
constrained medium-term growth prospects.
2.) The increased susceptibility to event risk stemming from the
government's high debt burden, heavy reliance on external
investors and large financing needs as the country enters a period of
heightened external market volatility.
Moody's believes that the combined impact of these factors will adversely
impact the government's financial strength and erode its shock-absorption
capacity. The rating agency's decision to maintain a negative
outlook on Hungary's ratings is driven by the uncertainty surrounding
the country's ability to withstand potential event risks emanating
from the European sovereign debt crisis.
Moody's has also downgraded by one notch to Ba1 from Baa3 the foreign-currency
debt rating of the National Bank of Hungary (NBH) given that the Republic
of Hungary is legally responsible for the payments on NBH's bonds.
RATIONALE FOR DOWNGRADE
The first driver of today's downgrade is the uncertainty surrounding
the Hungarian government's ability to meet its targets on fiscal
consolidation and public sector debt reduction over the medium term,
in view of higher funding costs and the low-growth environment.
Hungary's general government debt ratio at 81% of GDP in
2010 is materially higher than the Baa3 median. Although the government
has committed to reduce general government debt to 50% of GDP by
2018, the government's medium- term strategy to achieve
this goal remains unclear and reliance on one-off measures to date,
such as the liquidation of pension funds assets, will not improve
debt sustainably in the long term. While the budget for 2012 is
targeting a headline deficit of 2.5% of GDP through a combination
of structural reforms and ad-hoc revenue-generating measures,
Moody's believes that the government's ability to achieve
these targets will be constrained by the higher cost of funding and a
low-growth environment. Similarly, the Convergence
Programme envisages a 2.2% GDP deficit target in 2013,
but there is limited visibility on how the government plans to achieve
these targets in a low-growth environment.
Moody's expects the medium-term growth trajectory of the
country to be increasingly constrained by both domestic and external factors,
which, as noted above, add to the implementation risks of
the deficit and debt reduction plan. Having recorded subdued growth
levels for several years prior to the global crisis, Hungary's
economy contracted sharply in 2009 and has recovered only partially since
then. Moody's has revised its growth forecast for 2011 and
2012 to 1.5% and 0.5% respectively,
down from 2.7% and 2.6%. Domestically,
weak demand resulting from the deleveraging process in the private sector,
along with structural constraints such as high unemployment and low labour
participation, will further constrain the country's medium-term
growth potential. Externally, Hungary is affected by weakened
growth prospects among its main trading partners, particularly Germany,
and also by the crisis-driven impact on exchange and interest rates.
Finally, Moody's believes that the banking system's
ability to assist growth by extending credit will be constrained by rising
non-performing loans (NPLs), recent government measures affecting
banks profitability, and the reduced ability of foreign parent banks
to provide liquidity support to their Hungarian operations.
The second driver of today's action is the country's vulnerability
to external shocks stemming from the government debt structure,
which could in turn expose the government to funding cost pressures.
Approximately, 64% of general government debt is held by
non-residents, of which two thirds is denominated in foreign
currency. Moreover, the government's gross borrowing
needs will be significant in the next three years. The country's
general debt dynamics are already strongly affected by the weakness in
the Hungarian forint (HUF), and uncertainty over the effectiveness
of economic policy could further erode market confidence. This
is already reflected in a substantial increase in yields over the course
of 2011, resulting in a higher cost of debt on new issuance.
Moody's also notes that the banking system and private sector also
carry substantial external debt, adding to the country's vulnerability
to adverse foreign exchange rate movements. At an expected 131%
of GDP in 2011, Hungary's external debt is very high, relative
to the Baa3 median.
Moody's notes that Hungary's recent requests for assistance
from the IMF and the EU illustrate the funding challenges facing the country.
Negotiations with the IMF and EU have yet to begin, but the government
has stated its desire to negotiate a funding safety net without conditionality.
If negotiated successfully, such an arrangement could help to alleviate
immediate funding challenges. However, Moody's believes
that, even with such an arrangement, the government's
debt structure will remain vulnerable to shocks in the medium term,
which are inconsistent with a Baa3 rating.
As a result of today's rating action, Moody's has also
downgraded Hungary's country ceiling for foreign-currency debt
(to A3 from A1) and for foreign-currency bank deposits (to Ba2
from Baa3), as well as the country ceiling for local-currency
debt and bank deposits (to A2 from Aa3).
WHAT COULD MOVE THE RATING UP/DOWN
Moody's would consider a further downgrade of Hungary's government
debt rating if there is a significant decline in government financial
strength due to a lack of progress on structural reforms and implementation
of the medium-term plan. Such a decline could be accompanied
by lasting exchange-rate pressures or rising financing costs.
Conversely, Moody's would consider stabilising the outlook
on the government's Ba1 bond ratings (potentially leading to an eventual
ratings upgrade over the longer term) if the country were to embark on
a sustainable consolidation path, involving a more consistent implementation
of the medium-term plan and the Convergence Programme --
possibly supported by a resumption of robust economic growth --
which would stabilise government financial strength on a sustained basis.
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 relevant 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 relevant 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 relevant 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.
Information sources used to prepare the rating are the following :
parties involved in the ratings, and public information.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
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uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
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Alpona Banerji
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
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Moody's downgrades Hungary to Ba1, negative outlook
