Analyst View: Moody’s cuts Hungary to Baa3, outlook negative

BUDAPEST (BestGrowthStock) – Moody’s Investors Service on Monday downgraded Hungary’s credit rating two steps to Baa3, one notch above junk, citing long-term fiscal concerns and external vulnerabilities, and said more downgrades may follow.

Following is a sampling of analysts’ comments.

MARKET REACTION:

The forint traded at 280.35 at 1127 GMT from an opening quote at 278.40.

Bond yields rose 5 to 10 basis points to reach 8.1 percent on the 10-year segment, 8.03 percent on the 5-year and 7.95 percent on the 3-year paper.

CDS spreads rose by 20 basis points to 385.

MOODY’S COMMENT:

DIETMAR HORNUNG, SENIOR CREDIT OFFICER

“We assess that the Baa3 rating is the right rating and reflects Hungary’s credit worthiness appropriately. That’s why we went for a two-notch downgrade — based on our concerns regarding medium to long term fiscal sustainability and also to reflect the external vulnerabilities that are out there.”

“The negative outlook speaks to the next 12 to 18 months — this reflects uncertainties to the downside that we see. We have concerns regarding the structure of public finances — based on the measures that have been announced, we’re expecting a deterioration of the structural budget balance, and that’s something that bodes ill for the government’s financial strength in Hungary.”

“In case the government or policies could indicate that the structure of the government’s financial strength and public finances is to be stabilized, obviously that would be positive news here.”

“Hungary, being part of the EU, remains a supportive basis for economic development, that supports credit. Recent economic indicators were quite favorable for Hungary. The country benefits from economic growth in Germany… Being part of the EU is a supporting factor for Hungary in the credit assessment.”

ANALYST COMMENTS

EURASIA GROUP:

“None of this is surprising, given the government’s continuing failure to address structural debt dynamics. Cutting income taxes, introducing punitive taxes on selective sectors (finance, energy, telecom, retail), nationalizing the pension system, and gutting the fiscal oversight agency does not count as responsible fiscal consolidation.”

“A further downgrade (to below investment grade) would be very problematic, particularly for 2012-14 when Hungary needs to repay its EU and IMF loans.”

“Tensions between the government and central bank are likely to continue, which may lead to more market volatility (and conflict with the EU).”

“The government is planning to change the rules in order to push through four new (likely dovish) MPC members. This would tip the balance on the seven–member committee, and raise fears about growing inflation.”

“The government keeps referring to the potential for material structural reforms. This could potentially include key things like administrative, healthcare, education, and tax reform. And they have the two-thirds majority in parliament that would make carrying out these changes (and changing the constitution to do so) plausible. But they have not shown any indications yet that they are serious about this.”

CITIBANK:

“The Moody’s action is in line with our view that recent economic policy decisions in Hungary resulted in a deterioration of medium term fiscal outlook and less predictable business environment. Hungary stands out in terms of ratings as compared to other Central European countries, including Czech Republic, Poland or Slovakia.”

“And although so far financial markets have remained relatively calm, a mix of a rating downgrade, disappointing fiscal adjustment and high external vulnerabilities could lead to higher FX volatility in the coming weeks, especially if the euro area sovereign debt crisis intensifies.”

UNICREDIT

“Although the market reaction was immediately negative (5Y CDS jumping to 375-390bp, EUR/HUF jumping by about 1 percent and rates moving higher by about 10bp) we note that the credit market has already priced in a downgrade.

“Even more, the CDS spread compared with Romania is much wider, which indicates that the market is actually pricing even more downgrade.”

ZSOLT KONDRAT, MKB BANK

“This downgrade was in the pipeline so it is not a surprise. The main reason for Moody’s action was the high medium-term or structural deficit caused by the government’s decision to cut taxes and finance this from temporary measures and also the forced reversion of the pension reform.

“The logic of the economic policy is to increase the competitiveness of the Hungarian tax system allowing for the creation of new jobs and higher growth. The government expects this to plug in the hole in the pension system and to lead to lower taxes later on.”

SIMON QUIJANO-EVANS, CHEUVREUX

“Moody’s has gone all the way to a two notch downgrade of Hungary’s LT FC rating to just above sub-investment grade (Baa3, negative outlook).

“It is now on par with S&P, with the bigger risk being the latter going one step further… We remain underweight Hungarian equities, and don’t recommend taking exposure.”

ELISABETH ANDREEW, NORDEA

“The move was not a complete surprise, as the rating agency already in July warned that Hungary might be downgraded.”

“We reiterate that we do not like what is happening in Hungary and see the HUF as one of the most vulnerable currencies in the region.

“Nevertheless, we believe market forces to some extent will prevent the government from doing even more harm – a weaker HUF will hurt households and corporates with a large share of FX loans.”

GYORGY BARTA, CIB BANK

“The Moody’s downgrade does not come as a surprise, the agency has lagged both S&P and Fitch with its rating moves (now they have caught up to S&P’s level and warned of further potential downgrades).

“We have yet to see what the government’s planned “structural reforms” will entail, the announcement will be made in February. Ratings agencies may also give the government some leeway until that time.

“Market players all hope that another disappointment will be avoided and structural reforms will, indeed, be structural in nature and will affect wasteful state-managed systems.

“The government has enough political room to carry out the necessary transformations, there is no reason for hesitation or a “watering down” of fiscal consolidation.”

MATYAS KOVACS, RAIFFEISEN BANK

“The negative surprise is because of the two notches, not the downgrade in and of itself. Moody’s had warned they might downgrade, though they said they would do it earlier. This fits our expectations, though not necessarily the pace of it.

“Now the rating and the outlook are the same as that of S&P, but we expect some weakening in Hungary’s forint and other assets. The full extent of the weakening can usually be felt after a few days, so no immediate move does not mean there will not be any weakening.”

(Reporting by Marton Dunai and Gergely Szakacs; Editing by Toby Chopra)

Analyst View: Moody’s cuts Hungary to Baa3, outlook negative