Fitch’s Xmas gift for Hungary leaves analysts agog

December 21, 2012

Hungary’s outlook upgrade to stable from positive by Fitch was greeted with incredulity by many analysts. Benoit Anne at Societe Generale wonders if the decision had anything to do with the Mayan prophecy that proclaiming the end of the world on Dec. 21:

What is the last crazy thing you would do on the last day of the world? Well, the guys at Fitch could not find anything better to do than upgrading Hungary’s rating outlook to stable. Now, that really makes me scared.

A bit brutal maybe but the point Anne wants to make is valid — nothing fundamental has changed in Hungary — its GDP growth and debt numbers are looking as dire as before and the central bank is still subject to political interference.

Now, it is true that investors’ worst fear — a default on external debt — hasn’t happened. And, remarkably, Hungary’s currency is among the best performing in emerging markets this year with a gain of around 11 percent against the dollar.  The country also now runs a current account surplus, though that is down to the dire state of the economy which has pulverised consumer demand.

Hungary has managed to avert disaster thanks to the euro zone improvements plus the waves of Western money printing which have pushed cash into domestic bond markets (yields of 5-6 percent look attractive and the central bank is slashing interest rates). The possible downside of all this is that Hungary now can escape signing an aid deal with the IMF which  would have imposed some conditionality. Anne says:

Looking back at 2012, Hungary’s track record has been a nice collection of policy errors, both on the fiscal and monetary fronts. Now, if what Fitch means is that contagion risks have subsided, and therefore the external shocks may not be as severe as we initially feared, they are right. But from a fundamental standpoint, I still have very little positive to say about the overall picture.

It’s worth noting that another ratings agency Standard and Poor’s cut Hungary’s rating a month ago to BB, two notches into junk territory. The Fitch rating meanwhile is BB+. In Fitch’s defence,  one could argue the markets have been ahead of the ratings agencies  in the sense that the country no longer has immediate financing constraints.  Fitch also notes the reduction in the  budget deficit.

Next year will bring more tests though. The euro crisis is by no means totally resolved and investors could yet flee risky bond markets such as Hungary’s. Meanwhile Budapest will need to raise over $5 billion in 2013 while on local bonds it must raise the equivalent of $8 billion. That could turn out to be tougher than expected should the global environment turn sour.

All irrelevant perhaps; we’ve still got a few hours for the Mayan prophecy to come true after all.

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