Capital Intelligence, the international emerging markets rating agency, has assigned a negative outlook to Hungary’s long-term foreign currency rating of A- (A minus) following concerns about the deterioration in the country’s fiscal and current account positions and the associated increase in government and external indebtedness. In line with this action, the outlooks on the A- long-term foreign currency ratings of two Hungarian banks – Central European International Bank and OTP Bank – have also been revised to negative.
The general government budget deficit, including pension costs, is on course to exceed 10% of GDP this year while government debt, around 30% of which is in foreign currency, is expected to increase to about 69% of GDP by year-end and to remain on an upward trajectory. Fiscal expansion has contributed to the widening of the current account deficit, which is likely to reach 9% of GDP in 2006, while gross external debt is projected to be about 95% of GDP. Economic and financial vulnerabilities are exacerbated by the growth of foreign currency borrowing outside of the government sector, with about 40% of household debt and over 60% of corporate debt denominated in foreign currency.
Capital Intelligence notes that further exchange rate depreciation and/or higher interest rates in response to a deterioration in investor sentiment would likely cause public and external debt dynamics to worsen further and could contribute to a slowdown in economic growth by weakening private sector balance sheets.
In response to growing threats to macroeconomic and fiscal stability, the government has unveiled ambitious plans to reduce the budget deficit to 4.3% of GDP by 2008. However, the ongoing political crisis has created uncertainty about the future leadership of the country and increased the risk that necessary fiscal reforms will be postponed or implemented more slowly than currently planned. Fiscal consolidation is vital for reducing the country’s external vulnerabilities, and failure to press ahead with reforms in the near term could result in Hungary’s foreign currency rating being lowered from its current level.
