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Interfax: S&P ratings agency downgrades Hungarian sovereign debt to 'BBB+' from 'A-', outlook negative

15.6.2006 15:50

BUDAPEST. JUNE 15. INTERFAX CENTRAL EUROPE - Credit rating agency Standard & Poor's (S&P) Thursday lowered Hungary's long-term sovereign credit ratings to 'BBB+' from 'A-' with a negative outlook on continued deterioration of Hungary's public finances and warned it may be lowered further if the budget deficit and government debt continues to grow.

"The downgrade reflects the continued deterioration of Hungary's public finances, as evidenced by very high general government deficits and quickly rising government debt figures ... The ratings on Hungary could be lowered further if government debt levels continue to rise as rapidly as at present," said S&P credit analyst Kai Stukenbrock in a statement.

The downgrade comes just a few days after Hungary's government announced a wide range of fiscal measures to drastically cut the budget deficit over the next two years. However, the package has been criticized by analysts for its reliance on higher tax revenues, which they said could impede economic growth, and the lack of meaningful structural reforms on the expenditure side.

S&P affirmed Hungary's 'A-2' short-term ratings. The outlook was deemed negative due to the lack of structural reform measures to rein in government spending.

Stukenbrock, however, noted that "the negative outlook could revert to stable if additional far-reaching structural measures were implemented that ensured the sustainable reversal of the upward trend in the government debt ratio."

S&P said that it downgraded Hungary because recent budget reform measures introduced by the government are outweighed by the growing budget deficit and government debt, which S&P said pose a threat to economic stability.

"Although the envisaged size of the consolidation program is impressive, it needs to be considered alongside the deterioration of public finances that accompanied it, which exceeds the consolidation efforts. Consequently, Standard & Poor's expects the deficit to fall only to a still-high 6.8% of GDP in 2009, from 11.0% in 2006," the statement said.

S&P calculations include the cost of second-pillar pension reform and off-balance-sheet road construction, which are together equivalent to about 2.5% of GDP. The government's own recently-revised budget-deficit target for this year is 8% of GDP, which it plans to reduce to 5% next year and 3-3.5% in 2008.

S&P added that on the current fiscal trajectory, general government gross debt would exceed 74% of GDP by 2009, from 60% in 2004.

"High deficits effectively preclude accession to the Eurozone before 2014. Unsustainable fiscal deficits continue to fuel external imbalances that leave the Hungarian forint vulnerable to changes in financial market perceptions, and undermine confidence in macroeconomic stability. This poses an increasing risk for growth and investment prospects, as well as for the inflation outlook," said S&P.

Ratings agency Moody's revised its outlook on Hungarian sovereign debt from stable to negative in February while maintaining its 'Aa1' rating. Fitch downgraded Hungarian sovereign debt to 'BBB+' from 'A-' last December but maintained its stable outlook.

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