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Rating Action:

Moody's downgrades Hungary to Ba1, negative outlook

Global Credit Research - 24 Nov 2011

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.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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 downgrades Hungary to Ba1, negative outlook
No Related Data.

 

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