Hungary: A Snapshot of Two-in-One Scoring Again | Item
Advantages and disadvantages
In its latest report, Fitch Ratings pointed out that the economic impact of the coronavirus crisis will sharply worsen fiscal measures, but it expects improvement beyond 2020. Fitch sees Hungary’s economy grow by almost 5%. % in 2021, followed by GDP growth of around 7% in 2021. 2022, the highest in the region. To see positive rating action, the previous review highlighted two areas that need to be improved after the pandemic. In public finances, the level of debt to GDP must be lowered and, at the macro level, a more predictable economic policy, an improved business environment with stronger medium-term growth prospects are needed without the emergence imbalances such as a large current account deficit or a prolonged high level of inflation.
As for S&P, its economic outlook for Hungary is just as positive as that of Fitch Ratings, saying the Hungarian economy is expected to reach pre-pandemic real GDP levels by early 2022, earlier than most other Central and Eastern European economies. However, Hungary must outperform this high expectation to trigger positive rating action by S&P. Another bullish scenario exists with a faster-than-expected consolidation of public finances, for example through recurring public surpluses.
Fitch and S&P see Hungary growing faster than regional counterparts, but weakening public finances are a problem
Regarding the possibility of negative rating action, both credit rating agencies have pointed out that a permanent weakening of public finances and unfavorable debt dynamics can trigger such action. In addition to the deterioration of fiscal parameters, the inability to manage an economic recovery (S&P) and the weakening of the institutional framework (Fitch) also pose downside risks to the rating.
To make an educated guess about the possible outcomes, it’s worth taking a look at the fiscal and macroeconomic outlook. The government expects only moderate debt reduction in the coming years, despite a significant increase in debt levels. In just one year, a decade of debt reduction has been canceled. However, based on the latest official projections from the Ministry of Finance, the level of debt to GDP will remain above 80% in 2021 and will remain above 70% until 2024. The government plans to return to the deficit / ratio ratio. GDP of 3% is only in 2023. This speed will hardly trigger positive action but should be enough to avoid negative action.
Regarding the economic outlook, we forecast a GDP growth of 4.3% in 2021 with an increase of 5% next year. However, this baseline scenario is surrounded by positive risks, as in our optimistic scenario we forecast GDP growth of 6% on average in 2021-2022. It also means high upside risks to the inflation outlook, which means prolonged high inflation. Since the stronger rebound could come from a better than expected increase in domestic demand (with a high import rate), this could lead to a more marked deterioration in current account parameters.