S&P keeps Hungary in junk on policy uncertainties

Standard & Poor’s (S&P) affirmed Hungary’s sovereign rating at BB+ with a stable outlook. The rating agency decided to keep Hungary in junk status saying that policy uncertainties could represent fiscal risks to the country’ public sector, which remains more indebted than those of regional peers. The stable outlook balanced S&P’s assessment of Hungary’s declining external vulnerabilities and steady headline fiscal performance against the country’s still-high general government indebtedness, less predictable policymaking, and weak underlying growth potential. According to S&P, certain policies of the central bank could potentially hinder the bank’s willingness to pursue its inflation-targeting mandate in the future. In particular, these policies included the National Bank of Hungary’s (NBH) assumption of interest rate risk via its provision of interest rate swaps to the market, which in S&P’s view will create losses if and when policy rates are raised. This could represent a conflict of interest with the mandate for inflation targeting, the agency implied.

On a positive note, Hungary’s ratings were supported by its lower external vulnerabilities that included lower forex government debt and reduced ownership of Hungarian sovereign debt by non-residents. S&P also assessed Hungary’s economy as being comparatively advanced and its export structure as relatively diversified.

More transparent and predictable policymaking along with better visibility of longer-term risks could trigger an upgrade of Hungary’s ratings, S&P said. The agency could also raise the ratings on improved longer-term economic growth and a faster reduction in public indebtedness. At the same time, deterioration in public finances or re-building of external vulnerabilities might push S&P into considering a rating downgrade.

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