S&P downgraded Hungary from BBB to BBB
This afternoon, S&P credit rating agency announced that they cut Hungary's current rating to 'BBB-' from BBB. In addition, the rating outlook will be negative.
According to the agency, the downgrade moving reflects the ongoing deterioration in the key Hungarian economic and fiscal indicators. Pressure on public finances continues to mount as revenues fall short, the government debt ratio mounts and the risk of financial sector contingent liabilities materializing increases.
The agency expects the Hungarian GDP to contract by 6% in 2009 and by another 1% in 2010, which will make it difficult to achieve the budget deficit target of 2.9% of GDP for 2009. They expect the government debt to rise to 83% of GDP in 2010, from 73% in 2008.
The negative outlook suggests sustained downside risks to the ratings. "Further deterioration in Hungary's economic and fiscal outlook, signs of liquidity or solvency problems in the financial sector, or a period of prolonged political paralysis could lead to a further downgrade of the ratings."
Assessment: The new BBB- rating is still in investment category, but this is just one notch away from non-investment grading, which could be frightening on the markets, especially taking into consideration the fact that the negative outlook suggests further downgrading. Based on the agency’s comment, it seems that apart from the current economic downturn, affecting negatively Hungary, the current political turmoil have had some role in today’s step. The new government (expected to be formed on April 14) with the leadership of Mr. Bajnai should carry out further cuts on the expenditure side of the budget in order to keep the deficit below 3% of GDP. The question is now whether they have enough support in the Parliament to make these steps. Thus, we share the view that the current more uncertain political situation, as well as continuously deteriorating growth outlook poses risks to the budget and public debt. However, the agency’s fears regarding signs of liquidity or solvency problems in financial sector seem exaggerated, in our view, as the new liquidity tools introduced by the CB (especially, the 5bn euro swap facility) have decreased tensions on the FX swap market and improved the overall situation, compared to October.
Market reaction: very negative, the forint exchange rate fell to 313 against the EUR, than slightly corrected. Based on the earlier tough comments of the central bank, however, we think that they will be ready to push the forint back below 310. Apart from the possible direct interventions on the domestic currency markets, the likelihood of a rate hike has increased, in our view.
