Fitch Ratings revised down the outlook for Hungary’s debt rating to negative from stable on Friday because of expectations of lower growth and eroding investor confidence.
Fitch, however, kept Hungary’s credit rating at “BBB-,” one step above junk, but said the country’s exposure to the effects of the eurozone’s sovereign debt crisis could lead to a downgrade.
“Positive rating action” could come if the government meets its budget gap targets, “particularly in the context of significant structural reforms and declining external debt ratios,” Fitch said in a statement.
FALLING EXPORTS
Hungary’s economy is closely linked to the eurozone, home to its major trading partners, and falling growth prospects in Germany, for example, would lead to falling exports, which have been the only source of expansion for Hungary’s economy in the past several quarters.
The ratings agency was also critical of the scheme allowing Hungarian households to cancel debts in foreign currencies at a large discount to current exchange rates, saying it would be “fairly ineffective” and put a strain on the banking sector.
In a response to Fitch, the nation’s economy ministry said that Fitch’s assessment was “excessively pessimistic” and vowed to meet its budget gap target of 2.5 percent of GDP for next year and defended the payback plan for loans in foreign currencies.
“The debt cancellation plan, beside being a source of true relief for families with foreign currency loans, lowers the country’s vulnerability and the exposure of the bank sector to external shocks,” the ministry said in a statement.
DENTING CONFIDENCE
Fitch also blamed government policies, such as the debt conversion plan and windfall taxes on the banking, energy, retail and telecommunications sectors, for “denting foreign investor confidence, on which medium-term growth prospects depend.”
While Hungary is sticking to its forecast of 1.5 percent growth next year, Fitch said it was cutting its own expectations to 0.5 percent for next year, down from its projection of 3.2 percent growth made in June.
While in 2008, Hungary became the first EU country to get a bailout from the IMF and other lenders — a US$25.1 billion standby loan to avoid bankruptcy — Hungarian Prime Minister Viktor Orban has chosen to do without the IMF safety net.
While this has given the government a freer hand to set economic policy, it is also cited as another risk factor facing the country’s economy.
Meanwhile, Standard & Poor’s Ratings Services said it placed Hungary’s sovereign ratings of “BBB-” and “A-3” on “CreditWatch with negative implications.”
The ratings “BBB-” and “A-3” are S&P’s lowest investment-grade ratings for long-term and short-term credit respectively.
A downgrade would put Hungary’s ratings into the category of junk.
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