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Sep 26, 2016 - Zoltán Kovács

With another credit rating upgrade for Hungary no more talk of “unorthodoxy”

In Thursday’s print edition of the Financial Times, following Standard and Poor’s decision to restore Hungary’s credit rating to investment grade, a commentator praises Prime Minister Orbán’s “economic miracle.” Once a staunch critic of Hungary’s “unorthodox” measures to restore its technically bankrupt economy, the British daily’s admiration is the first sign that S&P’s move closes an era of doubts over whether Hungarian reforms are working.

Standard and Poor’s has joined Fitch Ratings in officially recommending Hungarian state bonds for investment and Morgan Stanley’s London analysts expect the last of the three major credit ratings agencies, Moody’s, to do so in November. The overdue upgrade means that even the most cautious funds may now invest in Hungary’s growing economy. A milestone has been passed.

S&P noted that the country’s “rising employment and real disposable incomes are likely to continue fueling private consumption growth” and that “Hungary's external financial profile, which has improved considerably since 2009, will remain robust.” Both are understatements. Hungary is delivering the best employment data since the country began tracking official statistics on employment (1992), and today’s return to investment grade will drive even more investment. Following the upgrade and strengthening of the forint, Hungary’s Central Bank did not respond by cutting the base rate at its last meeting.

S&P’s upgrade brings more recognition that, though once dismissed as “unorthodox,” the government’s economic policies are working. We’ve come a long way since 2010.

Investors’ trust started to erode precisely 10 years ago when, in a speech to his party, the freshly re-elected Socialist prime minister, Ferenc Gyurcsány, candidly admitted lying about the country’s true economic output in order to get re-elected. It went downhill from there. Hungary, together with Greece and Iceland, was among the most exposed to the 2008 crisis. Hungary’s debt skyrocketed after years of economic mismanagement, unemployment and shrinking GDP before the crisis rocked global financial markets. Hungary, which had once outperformed the rest of the former Soviet bloc in the early years of the transition, had become such a risk that no one wanted to buy its state bonds and the country had to turn to the EU and IMF for a bailout in 2008.

Hungarian voters had had enough by 2010 and rewarded Viktor Orbán and Fidesz with a landslide in the national elections. However, that in itself would not have been enough. The country had fallen under the EU’s excessive deficit procedure and had a harder time accessing market financing. It suffered from a precarious increase in foreign currency-denominated debt in the private and public sectors. It had to both comply with the EU’s strict budgetary rules and produce growth at the same time. No wonder credit rating agencies downgraded the country’s national debt soon after the new government took control, making it even more costly to attract market funding.

The Orbán Government refused to follow the IMF’s typical counsel to implement strict austerity measures. Instead, the government pursued the so-called “unorthodox” measures, temporary taxes on certain sectors of the economy, relief for families from foreign currency-denominated debt, fiscal discipline and so on.  

By 2013, the country had proved that, regardless of its unfortunate state and the upcoming elections, the government had maintained a stable budget. Thus the EU’s excessive deficit procedure, which the country had been under since joining the EU in 2004, was finally lifted. In the same year, Hungary paid back all its debt from the IMF-EU bailout from 2008.

In 2014, the country’s GDP growth saw a big jump. With 3.7 percent growth, Hungary at last reached its pre-crisis level GDP, despite the fact that the budget was under control – i.e., no fiscal stimulus – and the debt-to-GDP ratio was shrinking.

2015 was a record-breaker. With steady growth and a shrinking debt-to-GDP ratio, Hungary produced a record high trade surplus and unemployment fell to the least ever recorded. According to Morgan Stanley’s Vulnerability Scoring Indicator, Hungary’s economic vulnerability decreased by more than any other country in the region between the 2008 financial crisis and 2015.

Arriving in 2016, even the staunchest critics of Hungary’s unorthodoxy, the credit rating agencies, started to reconsider their positions on Hungary. Not long after Fitch Ratings published a report that said that most countries take six years on average to recover an investment-grade rating, Hungary restored its credit rating with Fitch in just four years. S&P followed last Friday and Moody’s is expected to follow in November.

Nearing the fourth quarter of 2016, the country’s economic performance has continued to break records and Hungary has paid back the last installment of the 2008 bailout package to the EU.

Going forward, Prime Minister Viktor Orbán has set two ambitious goals: to achieve five percent GDP growth and a zero-deficit budget in the upcoming period. These would challenge almost any state in the EU, but they don’t seem so far-fetched here, as even the most conservative critics of Hungary’s recovery, the credit rating agencies and the Financial Times, have learned to appreciate Hungary’s “economic miracle”.