Hungary Sees Sovereign Bond Upgrade on Falling Debt, Improving Employment

A declining debt burden, structural economic improvements and a more resilient credit profile have led Moody’s Investors Service to recently upgrade Hungary’s long-term government bond ratings to Baa3 from Ba1, with a stable outlook.

“The stable outlook on Hungary's Baa3 rating reflects the balanced risks to the credit rating over the coming years,” noted Moody’s analysts, including Evan Wholmann, assistant vice president with the ratings agency. “Moody's expects the greater predictability in policy making seen in the last couple of years will be sustained, resulting in a more stable, growth-friendly policy environment in Hungary than in the past. At the same time — and while we expect some further improvements in the country's key fiscal and external metrics, in some areas such as the public sector debt burden — the country will continue to lag its Baa-rated peers.”

The Hungarian government has committed, through primary surpluses, resources to reducing its debt burden that should continue into the future, Moody’s analysts said, as they expect the debt-to-GDP ratio to decline to about 72% of GDP next year from a peak of around 81% in 2011. Also, the government’s debt has a lesser share in foreign currency, which helps increase Hungary’s resiliency in the face of foreign exchange rate shocks.

Also, Hungary’s economy should grow at a rate of 2% to 2.5% in coming years as it benefits from some of the largest fund inflows from the EU to Central and Eastern Europe over the next five years, Moody’s said. A public sector work program has driven up employment rates to 67.1% in the third quarter from about 55% in 2011.

The “bread basket” nation has also benefitted from a persistent current account surplus to the tune of some 3% of GDP over the past few years, compared to a 7% deficit in 2008, analysts said. “This reflects a robust and sustained improvement in the trade balance and gains in export product diversification,” Wholmann said. “Furthermore, Hungary no longer relies on external financing as its capital account benefits from the growing absorption of EU funds, such that the combined current and capital account surplus reached around 10% of GDP in the last quarter of 2015.”

– Nicholas Stern, editorial associate

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