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Editorial

Another Milestone on Hungary’s Impressive Road to Economic Recovery?

| November 19, 2015

The forecasts for Hungary’s economy have been trending positive for the past couple of years, a demonstration that the Orbán Government’s reforms are working. 

“Hungary moved closer to regaining its investment grade status at Moody’s Investors Service after Prime Minister Viktor Orban’s government helped reduce the country’s debt load and kept the budget deficit in check,” Bloomberg reported on the credit rating agency’s move late last Friday. The next business day, November 9, OECDreleased its forecast, predicting a healthy economic path for Hungary in the coming years: GDP growth higher than expected and debt on sharp decline. Recent data, like the country’s trade surplus remaining “gigantic” in September, supports OECD’s bullish outlook. The forecasts for Hungary’s economy have been trending positive for the past couple of years, a demonstration that the Orbán Government’s reforms are working.

Following Moody’s decision, Hungary now enjoys good prospects for an upgrade at two of the three big credit rating agencies, boosting the country’s and investors’ hope for an upgrade sooner rather than later. But why are we not there already?

According to the most recent report from Fitch Ratings, published November 3, a country has to wait an average of 6.1 years to be restored to investment grade once it’s long-term credit rating has fallen to non-investment grade. In the same paper, as portfolio.hu points out, Fitch Ratings also says that Hungary and Portugal would be the countries that have a chance of beating that average.

As the biggest corporate investors and financial markets make their decisions based partly on these credit ratings, countries given a “non-investment” grade by at least two of the three main credit rating agencies tend to find it harder or more expensive to sell their state bonds and, thus, finance their cash flow. The practice of the credit rating agencies is very cautious – they are not quick to downgrade in order to avoid panic, and they are not quick to upgrade either.

Hungary’s credit rating was downgraded to “junk” in 2012 at Fitch as a result of years of mismanagement from Socialist governments, leaving an exposed economy with mounting debt and slow growth just before the financial crisis of 2008. Then the crisis hit, quickly turning what had been loan-fuelled economic growth into steep decline.

The Orbán Government elected in 2010 brought in sweeping reforms and produced quick results. The most apparent was that only one year after the credit rating downgrade, the European Commission lifted the excessive deficit procedure that had been in place against Hungary for nine years. The budget deficit has remained under control, the debt-to-GDP ratio is on the decline, employment figures continue to improve and GDP growth has put Hungary among the leading EU economies.

In spite of that remarkable turnaround, Hungary has remained in the “junk” category. In Hungary’s case, it is clear that the credit rating agencies have indeed been slow – both when they downgraded in 2012 and now in waiting to upgrade – our sovereign credit.

The question remains whether the prediction by Fitch Ratings is correct, that Hungary will beat the average (along with Portugal) and see an upgrade before the six-year mark, which would be 2018. Analysts say that an upgrade is possible as soon as early next year, and we can’t see any reason they would be wrong. That would mean the removal of a significant growth impediment and another milestone on Hungary’s impressive road to economic recovery. We’re betting on Hungary.