Standard & Poor's Ratings Services said today that it lowered its long- and short-term local currency sovereign credit ratings on the Republic of Hungary to 'A-' and 'A-2', from 'A' and 'A-1', respectively, due to the country's weakened fiscal outlook and poor prospects for medium-term fiscal consolidation. At the same time, the 'A-' long-term and 'A-1' short-term foreign currency ratings on the sovereign were affirmed. The outlook is stable.
"The downgrade of the local currency rating reflects the deterioration of Hungary's medium-term fiscal outlook beyond earlier expectations," said Standard & Poor's credit analyst Beatriz Merino.The general government deficit on an ESA95 basis (including costs of pension reform) is projected to reach 5.2% of GDP in 2005, broadly unchanged from last year, and above the 4.7% government target. Despite wide-ranging controls on expenditures and a reserve equivalent to 0.8% of GDP introduced in the 2005 budget, Hungary will likely overshoot its fiscal target unless it takes additional tightening measures in 2005.
"Despite the commitment by the government to maintain fiscal discipline ahead of the 2006 elections, it may be tempted to relax its expenditure controls and implement tax cuts, which would pose additional fiscal risks.
Hungary is not expected to become a member of the EMU before 2010," added Ms. Merino.
The large current account deficit is projected to narrow only marginally, to about 8.0% of GDP by 2008, from 8.9% in 2004. Growth prospects remain positive. GDP is forecast to accelerate slightly to an annual growth rate of 3.8% in 2006-2008, compared with 3.5% in 2005. Inflation is expected to remain benign, at about 3.5% in 2005 and 2006, within the central bank's targets.
Under a reasonable worst-case scenario, Standard & Poor's expects the economy to weather any adverse shock without further deterioration to its creditworthiness. Relatively prosperous GDP per capita, a competitive,
diversified, and strong export sector, moderate external debt, and manageable external liquidity together would limit the impact of a potential sharp correction.
Further fiscal deterioration beyond current expectations, however, can only exacerbate Hungary's macroeconomic imbalances and eventually erode the country's creditworthiness, which could result in a negative rating action.