Home Ratingové hodnotenia a Výskum Aktuálne platné ERA affirms BBB rating to Hungary, outlook Stable
ERA affirms BBB rating to Hungary, outlook Stable
Piatok, 24 Máj 2019

The unsolicited credit rating assigned to Hungary stems from a strong economy, sound private sector finances, and above average governance indicators. The rating is restricted by high government debt load, high structural deficits, and weak external sector indicators.

Rating components

Macroeconomic factors

Economic factors

High

Debt and current account sustainability factors

Moderate

Public finance factors

Low

Private finance factors

High

Foreign exchange stability factors

Low

Liquidity factors

Very high

Final assessment

Moderate

Forward-looking factors

Political and economic stability

High

Efficiency and reforms potential

High

Final assessment

High

Overall score

Moderate

Final rating

BBB

Macroeconomic factors of rating assessment

The Hungarian economy is growing above its potential. Government debt is declining, but it still remains elevated. Weaker public finances along with low foreign reserves are constraining the capacity to tackle potential headwinds.

Ongoing robust growth:

The Hungarian economy is currently experiencing a period of strong growth supported by both domestic and external factors. As a relatively small open and export-oriented economy, it has benefited from the global recovery, which has boosted exports and investment. On the domestic front, growth has been fueled by expansionary monetary and fiscal policies along with the strong absorption of EU funds. With the global recovery losing momentum last year, domestic factors took over.

Robust and job-rich economic growth has led to a strong decline in unemployment, from above 10% in 2013 to 3.7% in Q4 2018. The rapid absorption of spare capacity in the labor market has led to labor shortages and the acceleration of wage growth. Wages grew by 11.3% in 2018 (in national currency) boosting household consumption, which increased by 5.4% last year and pushed the GDP growth rate to 4.9%, the highest since 2004.

ERA expects growth to moderate in the coming years due to softer external demand and internal capacity constraints. Private consumption, on the other hand, is expected to remain strong in light of tight labor market conditions. Figures from April show that more than 90% of companies in manufacturing and more than 30% in the service sector are having trouble finding skilled workers. In this environment, wage growth is very likely to remain robust. ERA expects the economy to grow between 3.5% and 4% in 2019 with risks being tilted more to the downside due to global trade tensions.

GDP growth in Hungary and EU-28 (%)

1

Source: Eurostat, ERA

In the medium-term, GDP growth will be supported by a smooth transfer of capital and technology within the EU, which should result in faster growth rates compared to western EU countries. ERA estimates the medium-term potential GDP growth to be around 3%. In the long-term, potential GDP growth is expected to decline due to below average R&D expenditure and negative demographics. Hungary has been experiencing population decline since the eighties and ERA expects this trend to continue.

Highest structural deficit in the EU:

The government debt to GDP ratio is declining. It fell from above 80% at the beginning of the decade to 70.8 % in 2018. ERA expects this trend to continue in the coming years. However, for a country at this stage of development, it is still elevated. Among the countries in the emerging and developing part of Europe, Hungary had the third-highest debt to GDP ratio in 2018 (after Croatia and Montenegro).

The current decline in the debt to GDP ratio is driven by nominal GDP growth and declining borrowing costs and not by fiscal consolidation. On the contrary, the general government is running deficits above 2% at the height of the economic cycle (the EU-28 deficit for 2018 stood at 0.6% GDP). In 2018, Hungary's structural deficit stood at 3.7%, the highest in the EU.

The Visegrad Group consists of four countries – Poland, the Czech Republic, Hungary, and Slovakia. The "V3 average" label used in the charts denotes the average of the Visegrad Group excluding Hungary.

General government structural balance in Hungary, EU-28, and Visegrad Group (% of potential GDP)

2

Source: AMECO, ERA


Deficits would be even higher without EU transfers, which are expected to decline in the new EU-budgeting period starting in 2021. Moreover, Hungary has the highest share of government revenue to GDP among its regional peers. In 2018, it reached 44.2%. Therefore, raising taxes, should it be necessary in the future, might prove to be more difficult.

On the other hand, the currency denomination and holder structure of the public debt has improved substantially since the beginning of the decade. The share of the central government debt denominated in foreign currencies fell from over 50% to below 20% and the share of the general government debt held by non-residents fell from over 70% to around 40%.

Very low household debt:

Private sector finances are in sound condition. Gross national savings grew to 27.5% in 2018 according to IMF estimates, the highest level in the post-communist era, which has made room for increasing investments from domestic sources. IMF estimates the gross domestic investment to GDP ratio at 26.9% in 2018, the second highest in the EU after Estonia.

After overcoming the issues related to mortgages denominated in Swiss francs in the aftermath of the financial crisis, the household debt to GDP ratio experienced a rapid decline from its peak above 40% at the beginning of the decade to 17.9% in 2018, the second lowest level in the EU after Romania. The indebtedness of private non-financial companies also fell sharply, from around 90% at the beginning of the decade to 66.8% in 2018, which is well below the EU average (103.6% in 2018). Nevertheless, it still remains the highest among Hungary's regional peers.

3

Source: Eurostat, ERA

The recent sharp increase in housing prices supported by loose monetary policy is not a source of greater concern. Although the annual increase (8.9% in Q4 2018 according to Eurostat) is one of the highest in the EU, the household debt to GDP ratio remains low (household debt is almost exclusively denominated in domestic currency) and the credit to GDP gap is deeply in negative territory (-26% in Q3 2018 according to BIS). Moreover, the central bank uses debt-service-to-income and loan-to-value limits to counter the overheating of the housing market.

Banking sector indicators are mixed. Despite a significant increase since the global financial crisis, the capital ratios remain below the EU average (the CET1 ratio stood at 15.3% in 2018, while the unweighted EU average was 17.4% according to ECB data). The NPL-ratio continues to improve. It fell to 4.6% in Q3 2018 according to ECB data (from almost 15% in 2013), however it still remains above the EU average. On the other hand, liquidity and profitability ratios are very high by EU standards.


External indicators are the worst in the region:

Hungary's external debt has decreased significantly in recent years. The ratio of external debt (including special purpose entities) fell from over 160% in 2011 to 98% in 2018 (81% excluding special purpose entities) as a result of private and public sector deleveraging, robust nominal GDP growth, and an increase in the residential holding of public debt.

Despite this improvement, Hungary's external debt remains the highest among its regional peers. Moreover, three quarters of the external debt are denominated in foreign currencies. Reserve coverage ratios are also the weakest among regional peers. In 2018, reserves covered approximately 3 months of imports and 21% of external debt (including special purpose entities). Although ERA sees no immediate risk for Hungary's external position (reserves cover more than 100% of the short-term external debt), an abrupt tightening of global financial conditions might put further pressure on the reserves and, thus, weaken the reserve buffers.

Foreign exchange reserves to external debt for CEE EU members with a floating currency

4

Source: ECB, ERA

Forward-looking factors of rating assessment

Governance indicators for Hungary are above average on the global scale, but the trend is negative.

Governance indicators are the worst in the region:

On the global scale, the governance indicators for Hungary are considered to be above average, but the trend is negative. They have been on the decline since the mid-2000s. The average of the five World Bank indicators monitored by ERA bottomed in 2016. Despite the slight increase in 2017, which can be attributed mainly to political stability/absence of violence and rule of law indicators, the composite indicator is still below the average of the Visegrad Group countries. Within its peer group, Hungary scored the worst in three of the five indicators.

The control of corruption indicator was the lowest on record in 2017. Corruption was identified as the second most problematic factor for doing business in the 2017-2018 World Economic Forum survey (by 14.9% of respondents) after the lack of an educated workforce. This implies a relatively high level of rent-seeking in the economy and constitutes a drag on economic growth. The lower quality of governance compared to most EU countries is also demonstrated by the ranking in the competitiveness reports. In both – Global competitiveness index and Doing Business – Hungary scores in the bottom quartile of EU countries.

Average of World Governance Indicators for Hungary and the Visegrad Group (ERA score, 1-10):

5

Source: World Bank, ERA

Outlook: Stable

The outlook has been assigned based on expectations of a soft landing of the global economy and further gradual decline in the government debt to GDP ratio and external debt.

The Stable outlook assumes that the rating will most likely stay unchanged within the 12-month horizon.

Key assumptions

• Debt to GDP ratio falling below 65% in the medium-term;

• Real GDP growth between 2.5% and 4% in the medium-term;

• Soft landing of the global economy;

• Political stability in the Eurozone.

Potential outlook or rating change factors

A positive rating action may be prompted by:

• Substantial decline in debt to GDP ratio below 60%;

• Substantial decline in structural deficit below 1.5% GDP;

• Substantial increase in reserve coverage ratios;

• Material increase in governance indicators.

A negative rating action may be prompted by:

• Substantial increase in debt to GDP ratio above 90%;

• Substantial widening of fiscal deficit above 4% of GDP;

• Material decline in exports above 10% year on year;

• Material decrease in governance indicators.


Appendix 1. Peer-analysis materials


General government debt/GDP (%) 2018:

6

Source: Eurostat


General government fiscal balance/GDP (%) 2018:

7

Source: Eurostat


Appendix 2. Major sovereign indicators

Indicators

2014

2015

2016

2017

2018_F

2019_F

GDP, bln EUR

105.5

110.9

113.9

124.1

131.9

143

GDP growth rate, %

4.2

3.5

2.3

4.1

4.9

3.9

GDP per capita, ‘000 EUR

10.7

11.3

11.6

12.7

13.5

14.7

Population, mln

9.9

9.9

9.8

9.8

9.8

9.8

Unemployment, year-average, %

7.7

6.8

5.1

4.2

3.7

3.3

Consumer inflation, year-average, %

0

0.1

0.4

2.4

2.9

3.3

External debt to GDP, year-end %

144.9

131.1

121.7

103.6

98.1

94

Public debt to GDP, %

76.7

76.7

76.0

73.4

70.8

68.6

Gross Domestic Investment to GDP, %

23.2

22.4

19.9

22.5

26.9

28

International reserves, bln EUR

34.6

30.3

24.4

23.4

27.4

27

Trade balance, bln EUR

6.7

9.0

11.0

9.2

6.2

3.5

Exports, bln EUR

92.6

98.7

102.2

109.4

114.1

120.5

Imports, bln EUR

85.8

89.7

90.9

100.2

107.9

117

Current account to GDP, %

1.5

2.8

6.2

2.8

0.5

-0.2


Appendix 3. List of material data sources

International Monetary Fund

World Bank

Bank for International Settlements

Eurostat

AMECO

Central Bank of Hungary

Hungarian Central Statistical Office

Regulatory disclosure

The unsolicited credit rating and outlook were issued in accordance with ERA methodology for sovereign entities in the version from July 4, 2018 (available at www.euroratings.co.uk, section Methodology). In the same section is a rating scale including an explanation of the importance of each rating category and a default definition. Information on the rate of historical failure is available at www.cerep.esma.europa.eu, and the explanatory statement of the meaning of those default rates is available at www.euroratings.co.uk (Regulatory Framework/Disclosure). This rating is issued as an unsolicited rating, i.e. was not initiated by the rated entity or a related third party. The rated entity did not participate in the rating process and the information and documentation for its development was obtained from publicly available sources in accordance with ERA methodology. ERA did not have access to the rated entity’s internal documents. ERA, in the context of routine care, verified all sources entering the rating process. ERA considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. No actual or potential conflicts of interest have arisen. Since July 30, 2012, ERA has been a registered credit rating agency according to Regulation (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009, on credit rating agencies. The rated entity was notified on May 22, 2019 and after the notification there were no changes or amendments in the rating. The rating was first released for distribution on November 30, 2018.



Download pdf:

Hungary Affirmation_24.05.2019_FV.pdf

Approved by the Rating Committee:

Zuzana Hrebičková, Acting

Head of credit rating analysts

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