Credit rating agencies Fitch, S&P, demote Hungary

Standard & Poor’s (S&P) downgraded Hungary’s credit rating by one step to the lowest investment grade of BBB- on Friday, partly due to Hungary’s current struggles in accessing some EUR 30bn of EU funding. 

The credit ratings agency also pointed to the negative effects of unforeseen crises as adding to its economic travails and limiting room for manoeuvre. “The downgrade follows a series of economic shocks to Hungary in the context of the Covid-19 pandemic and the Russia-Ukraine conflict, which have impaired the policy flexibility of fiscal and monetary authorities,” S&P wrote.

EU funding freeze starts to bite

The EU’s decision to suspend payment of funds was based on concerns over rule of law and corruption, and has contributed to Hungary’s fast-rising inflation and high interest rates.

S&P wrote that fiscal consolidation will be difficult, given Hungary’s still-elevated energy costs, a rising interest bill, and a challenging economic outlook. 

On energy, it is notable that Hungarian Prime Minister Viktor Orban’s administration signed a 15-year natural gas contract with Russia’s Gazprom while its EU peers have been reducing their dependence on Russian energy.

“Persistently high inflation, exchange rate volatility, and external pressures have prompted the Hungarian National Bank (MNB) to tighten its policy stance through a series of conventional and unconventional measures,” S&P added.

However, the stable outlook for Hungary reflects S&P’s expectations that the country will avoid a substantial economic downturn in the next two years and withstand the indirect effects of the Russia-Ukraine war.  

Fitch also demotes four local banks

Fitch, which also has Hungary at the second-lowest investment grade, as does the world’s third key credit rating agency, Moody’s, also downgraded the country’s outlook to negative on Friday. 

This came the day after Fitch had announced that it has changed its rating on four Hungarian banks from stable to negative, as a result of the revised outlook on Hungary’s sovereign rating. The affected banks were Magyar Eximbank, the Hungarian Development Bank (MFB), Erste Bank Hungary, and K&H Bank.

Despite the negative outlook revision, Fitch confirmed the BBB long-term issuer default ratings of state-owned Magyar Eximbank and MFB, as well as the BBB+ ratings of Erste, owned by Austria, and K&H, a unit of KBC.

Auto outsized in Hungary’s manufacturing mix – economist

The last time that S&P downgraded Hungary’s rating – from BBB+ to BBB with a negative outlook – in August, Hungarian economist Magdolna Csath underscored the challenges facing the Hungarian economy as high value-added sectors and relatively low productivity. These could be hampering the country’s growth prospects and the outsized share of the automobile sector (28% of manufacturing) could pose a significant risk to the Hungarian economy, according to Csath.

The economist said Hungary should no longer use state aid to encourage the relocation of energy-intensive assembly companies with low productivity, as this has not proved effective in promoting economic growth and development in Hungary in the past.

Csath also noted that while Hungary and Slovakia have similar economic structures, with a high reliance on energy-intensive assembly industries, Slovakia’s creditworthiness is far superior to Hungary’s. Csath said this discrepancy could be partly due to the political orientation of the Slovak government, which is taken into account in the credit rating process.

Despite the risks, Hungarian assets have rallied since the Hungarian Central Bank MNB’s emergency rate hike in October. Since then the yield on Hungarian ten-year government bonds has dropped more than 300 basis points and last week the forint strengthened to an eight-month high against the euro, Bloomberg wrote. The MNB last week pledged to maintain a tight monetary policy until a noticeable improvement in Hungary’s risk profile emerges.