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Jun 01, 2016 - Zoltán Kovács

Here’s why this major credit rating agency is bullish on Hungary and why the others should be too

In recognition of Hungary’s successful efforts to revive its economy, Fitch Ratings upgraded the country to investment grade recently. Although the upgrade came earlier than statistics might suggest, it was no surprise as markets had already priced Hungary’s widely anticipated return to investment grade at multiple credit rating agencies this year. Fitch’s upgrade signals important recognition that Hungary’s reforms are working.

According to Fitch’s own statistics, most countries require six years on average to return to investment grade after being downgraded. In a little over four years, Hungary exceeded expectations, yet some analysts questioned whether the upgrade would take place. Those who predicted the upgrade cited Hungary’s numbers: a shrinking ratio of debt-to-GDP, a growing GDP, strict fiscal policy, a high current account surplus and so on. Those who predicted a delay cited political reasons like Hungary’s allegedly unorthodox economic policy.

Hungary’s economic policy ought not to be underestimated. Hungary regularly has been selling state bonds at low prices despite the downgrade four years ago and these state bonds were usually oversubscribed. In other words, the markets already viewed Hungary’s economy as on the recovery path, even if the credit rating agencies were cautious about Hungary’s economic policy bearing fruit. This year, following credit insurance company Coface’s move in January and Fitch’s recent similar action, analysts now believe Hungary qualifies as investment grade. According to Minister of National Economy Mihály Varga’s estimate, that would further lower interest rates on state bonds, bringing an extra HUF 40–60 billion in savings to the budget in the next 12–18 months.

While the rating upgrade was overdue, the timing could not have been better as the Parliament is taking up the business of the 2017 budget. The new budget, besides helping every citizen to “make a step forward,” by reducing tax and aiding families, focuses on improving those sectors that still lag behind.

According to preliminary data compiled by the Hungarian Central Statistical Office (KSH), the output of the Hungarian economy grew by 0.9 percent year-on-year in the first quarter of 2016. The surprising slowdown was, according to analysts, mostly due to the underperformance of the construction sector. However, a rebound is expected under a government subsidy program launched in 2016. The Family Housing Allowance (CSOK) grants families with one or more children significant support for home construction and a preferential VAT rate of five percent on the sale of new residential properties. As a result, the number of new housing units is expected to increase to 13,000 this year. The forecast for 2017 expects even better performance in this sector.

Steadily improving employment trends, with the number of economically active people growing by 150,000 year-on-year, and low oil prices will also play an important part in driving growth in 2016. The pace of the disbursement of EU funds and bank lending are also expected to accelerate.

Fitch noted the aforementioned trends as well as Hungary’s responsible fiscal policy, thanks to which, in April 2016, the central sub-sector of the state accumulated a deficit of HUF 144.9 billion, down HUF 465 billion from last year’s sum. This figure is among the lowest in the past fifteen years, especially for this time of the year. The government continues a responsible, tight-belt fiscal policy.

Hungarian economic policy will abstain from reckless spending and artificial, loan-fuelled growth, not to mention the policies of the pre-2010, Socialist governments, which nearly led to the country’s default and the credit rating downgrade in the first place.

According to Fitch’s own estimate, Hungary’s Net External Debt (NXD) was reduced to 48 percent of GDP in 3Q15 from 73 percent in 2012. Even according to contrasting Hungarian and European methodologies, the country’s debt has shrunk by almost nine percent since 2010, while Hungarian GDP passed its pre-crisis peak in 2015.

Fitch’s overdue upgrade is another indicator that Hungarian reforms are working. On its own, it does not significantly improve market conditions, as Hungary was already perceived as a recovered and steadily growing economy. But it’s still significant. Despite the clearly political nature of credit ratings, numbers eventually overcome politics when it comes to economy.