Hungary upgraded by Moody's

Moody's also changed the outlook for the Hungarian sovereign rating from positive to stable, the former having been effective since September last year. 

In the rationale for the decision, the company highlighted among the main factors of the upgrade that there was a strong growth rebound throughout the first half of this year, which also contributed to a stronger resilience of the Hungarian economy. This was also supported by effective fiscal and monetary policies.

The credit rating agency said it considered also the medium-term outlook to be strong, mainly due to robust investment momentum.

Moody’s expects Hungary's potential GDP growth to be around 3 to 4 percent annually over the next five years.

The agency assesses that the strong growth rebound and the equally strong medium-term outlook will support fiscal consolidation and a reduction in the public debt burden, underpinning the strength of Hungary's fiscal position. 

In addition to improving the sovereign debt rating, Moody’s has also raised Hungary's local currency and foreign currency ceilings to A1 from A2.

According to Moody's analysis, the four-notch gap between the local currency ceiling and sovereign rating reflects a moderate government footprint in the Hungarian economy, strong predictability of government actions, reliability of key institutions, as well as moderate political risks and robust external vulnerability profile. 

Moody's emphasizes that the foreign currency debt ceiling is at the same level as the local currency ceiling.

Hungary's fiscal and macroeconomic policies are subject to regular assessment by the European Commission, and the strong connections through trade and investment with the EU minimize the risk of transfer and convertibility restrictions, the rationale for the upgrade decision states. 

Moody's points out that due to the coronavirus epidemic, Hungary's gross domestic product contracted by 5 percent last year, which is less than the European Union as a whole, whose economic performance fell by an average of 5.9 percent in 2020.

In Moody's view, the medium-term outlook of the Hungarian economy until 2025 is underpinned by high investment rates, reflecting Hungary's attractiveness to foreign investors and the Hungarian government's growth-friendly economic policy, including low corporate taxes and ongoing reductions in employers' social security contributions. 

The investment rate in the Hungarian economy was 27.6 percent of GDP last year, which is higher than the EU average of 22 percent, the rating agency emphasizes in its analysis.

Moody's also points out that none of the  major investment projects - including capacity expansion projects in the automotive industry and greenfield projects - were cancelled in Hungary last year. 

The agency expects that a net positive inflow of foreign direct investment into the Hungarian economy corresponding to 0.3 percent of GDP is likely during 2021- 2025. 

The rating agency also expects Hungary to be one of the few sovereign debtors in the Baa category that will manage to reduce their government debt-to-GDP ratio in the period 2020-2023. 

Moody's projects that the Hungarian government debt ratio will decline by almost 4 percentage points to 76.7 percent of GDP, and Hungary's debt burden as a share of GDP will narrow the gap to Baa2-rated average and median, which are broadly stable around 65% of GDP.

At the same time, based on a strong revenue base, the Hungarian debt-to-revenue ratio of 184.9 percent compares favourably to the Baa2-rated peer group median of 285.3 percent, Moody's Investors Service emphasizes.

After the upgrade by Moody’s announced on Friday, all three global market-leading rating agencies register Hungary with the same sovereign debt rating and outlook for the first time in several years. 

Moody's new Baa2 rating for Hungary corresponds to BBB in the methodology of the other two major credit rating agencies, Fitch Ratings and Standard & Poor's.

Fitch and S&P improved Hungary's sovereign debt rating from BBB minus to BBB two years ago, so Hungary's rating had been one notch lower at Moody's than at the other two credit rating agencies before the recent upgrade announced in London on Friday. 

Moody's also changed the outlook for the Hungarian rating from positive to stable. Fitch and S&P also have a stable outlook for Hungarian ratings.