Fitch cuts rating outlook on Hungary to negative - Country one step closer to junk grade
Thursday, 17 November 2011 09:58
Hungary is now the closest possible to junk grade at Fitch Ratings as the credit rating agency has revised the Outlooks on the country’s Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the ratings at 'BBB-' and 'BBB', respectively. Hungary is now a single step away from non-investment status with a negative outlook at all three major rating agencies (Fitch, S&P and Moody’s). The downward revision of Hungary’s outlooks by Fitch on Friday afternoon may be considered a positive move, since the rating agency has at least not downgraded the country. But we need to note that the market was expecting not Fitch but rather any of its two peers to make that move.
"The revision in Hungary's Outlook to Negative reflects a sharp deterioration in the external growth and financing environment facing Hungary's small, open and relatively heavily indebted economy," said Matteo Napolitano, Director in Fitch's Sovereign Group. "Moreover, various fiscal policy measures and the scheme to allow the repayment of household foreign currency mortgages at below market exchange rates have dented foreign investor confidence, on which medium-term growth prospects depend," he added in a statement.
Later Standard&Poor's Ratings Services announced that it placed its 'BBB-/A-3' foreign and local currency sovereign credit ratings on Hungary on CreditWatch with negative implications. At the same time, it placed the 'BBB-' long-term counterparty credit rating on the National Bank of Hungary (NBH) on CreditWatch with negative implications.
"Hungary is particularly exposed to any deterioration in the economic and financial conditions in the eurozone, owing to its open economy, mainly Western European-owned banking sector, relatively high levels of public and external debt and financing ratios, sizeable stock of portfolio investment (including a 40% non-resident share of domestically issued government debt) and Swiss Franc (CHF) mortgages debt," Fitch Ratings said.
Growth prospects have weakened sharply both in Hungary and in its main Western European trading partners in recent months. In October, Fitch revised its forecast for 2012 eurozone GDP growth down to 0.8% from 1.8% previously, and to 1.6% from 1.7% previously for 2011. Following a sharp weakening of growth prospects both in Hungary and its main Western European trading partners in recent months and the downward revision of its growth forecast for the eurozone (to 0.8% from 1.8% for 2012 and to 1.6% from 1.7% for 2011), Fitch presently expects Hungary’s economy to grow by only 0.5% in 2012, down sharply from the agency's projection of 3.2% in June 2011. It noted that the country’s "domestic demand is weighed down by fiscal tightening and private-sector de-leveraging.
"The government appears committed to fiscal consolidation and through the course of 2011, has set out an array of measures in the Széll Kálmán plan in March, the Convergence Programme in April and the new measures announced in September. Despite some widening in the structural budget deficit in 2011, it will run a general government surplus in 2011 of around 3.5% of GDP, driven by large one-off factors such as the return of private pension assets to the public sector. Fitch forecasts that government debt will decline to around 76% of GDP at end-2011, from 80% at end-2010."
"For 2012, the government intends to reduce the structural budget deficit by over 2 percentage points of GDP to bring the headline deficit to 2.5% of GDP, thus taking Hungary out of the EU's Excessive Deficit Procedure (EDP)."
"However, the weak growth outlook, the uncertain costing and implementation of some measures and potential reform fatigue make this challenging. Fitch forecasts a 2012 budget deficit of 3.3% of GDP."
"Over the course of 2011 the Hungarian forint (HUF) has depreciated by 13%-14% against both the euro and the CHF, thus increasing further heavy public- and private-sector debt repayment burdens. The government's policies to tackle the large stock of CHF-denominated household debt (equivalent to 16% of GDP in mid-2011) may turn out to be fairly ineffective and have negative consequences. Credit constraints and a lack of sufficient savings will likely prevent the share of CHF loans that are repaid early at a preferential exchange rate from rising above 20%-25% of the total."
The National Economy Ministry has issued a statement practically the same time Fitch released its report, saying it does not share the rating agency’s assessment of Hungary. It claims the deficit target of below 3.0% of GDP (2.5% officially) for 2012 is attainable, and that even the EU executive acknowledged that state debt will decline. (What the EC said actually is that the debt will increase: "Given both the forecast deficit numbers and the exchange rate assumptions, gross public debt is expected to increase again to nearly 77% of GDP following a temporary drop in 2011 due to the takeover of the private pension assets," the EC said.") The ministry also said that contrary to the concerns of the rating agency about the country’s foreign currency exposure, the early repayment scheme not only means real help for families burdened by FX mortgages but also reduces the country’s vulnerabilities and the exposure of the banking system to external shocks.