Fitch Ratings, the international rating agency, assigned the Republic of Hungary's upcoming Japanese Yen (JPY) denominated bond an expected A minus rating. The Samurai will be a two-tranche bond with maturities of five and seven years, and is expected to raise around JPY50 billion to JPY75bn. The rating is in line with Hungary's long-term foreign currency rating, on which the outlook is Negative. The assignment of the final rating is contingent upon receipt of final documents conforming to information already received.
The Samurai will be Hungary's fourth foreign bond issue this year and should complete its planned 2005 gross international issuance of EUR3.5bn. Fitch placed Hungary's ratings on a negative outlook in July 2003 and downgraded its long-term local currency rating to 'A' from 'A+' in January 2005. The move reflected concerns over Hungary's sizeable and persistent budget deficits, which have increased public debt, unbalanced the economy, exacerbated the current account deficit, eroded policy credibility and delayed Hungary's timetable for adopting the euro.
Outturns so far this year reinforce Fitch's view that the government is likely to miss its budget deficit target of 4.7% of GDP (European System of Accounts (ESA) basis, consolidated general government excluding mandatory private pension funds) yet again. Fitch is forecasting a deficit of around 5.5% of GDP in 2005 but there is a relatively wide margin of error (partly related to uncertainty over the treatment of some items in the ESA accounts). Today's announcement of tax reforms, strong underlying fiscal pressures and parliamentary elections scheduled for the spring lead Fitch to expect little progress with fiscal consolidation next year.
Nevertheless, some rebalancing of the economy is underway. Inflation and wage growth are declining, while productivity growth is brisk, allowing the National Bank of Hungary to reduce interest rates to 7% in June from 9.5% in December. However, the persistent large twin budget and current account deficits involve substantial financing needs, which render Hungary vulnerable to shifts in investor sentiment. Hungary's sovereign ratings continue to be underpinned by an open and diverse economy that benefits from a large stock of foreign direct investment and is closely integrated with the wealthy EU market. Levels of education and skills are advanced relative to wages and income, while investment rates are high. This platform provides good prospects for continuing "real convergence" with richer EU countries.