February 17, 2022

12038

Hungary
Chief Analyst
Chief Analyst

Toshihiko Naito
Atsushi Masuda

Long-term RatingA-

Outlook*

StableShort-term Rating-*Long-term Rating refers to Foreign Currency Long-term Issuer Rating in principle.

Overview
Hungary is a medium-sized economy in Central andEastern Europe (CEE) with a nominal GDP of
approximately USD 156 billion and a population of about
9.8 million in 2020. Since its economic transition in theearly 1990s, the country has pushed economic reforms
and proactively introduced foreign direct investment(FDI) well ahead of other CEE countries. It joined NATOin 1999 and acceded to the EU in 2004. As Hungary
strengthened its ties with other European countries
through international trade and finance, its economic
structure has grown increasingly export-oriented. Since
taking office in May 2010, the Viktor Orban
administration has been capitalizing on its strong
political base to push ahead with policies initiallydeemed to be unconventional to pull out the country
from a prolonged economic slump after the global
financial crisis. These policies have proved effective inovercoming the country’s longstanding structuralproblems, reviving the economy and solidifying its
economic and fiscal bases. The country has experienced
several COVID-19 pandemic since the spring of 2020,and has introduced large-scale economic measures tomitigate a steep economic contraction and support anearly economic recovery.

Socio-political condition and economy policy
In the process of its EU entry negotiations, Hungary
had to make a major review of its political, economic
and fiscal systems. New systems in conformity with the
EU standards have been put in place to ensure political<1>and social stability. In the general election held in April
2010, the alliance of conservative right-wing FideszHungarian Civic Union and the Christian Democratic
People’s Party won a two-third majority. Prime Minister
Orban formed his second administration following thefirst one in 1998. In the April 2014 and April 2018
elections, the alliance retained its two-third majority,
allowing Prime Minister Orban to remain in power. A
general election is scheduled for April 2022, and despite
the moves of the opposition alliance, the Orban
administration is likely to be re-elected mainly because it
has so far been praised for its prompt response to thepandemic.
The Orban administration has been promoting a
policy that puts greater emphasis on the role ofgovernment. On the political front, it has swiftly enacted
a new constitution, cut the number of parliamentaryseats and changed the election system. On the economic
and fiscal fronts, it has pressed ahead with broadranging reforms on the labor market, pension system,
public finance and financial system with an aim to revive
the economy and regain the stability of public finance. It
has adopted some so-called unconventional policies
including introduction of a special tax targeted at
specific industries, transfer of private pension assets to
the government sector and a rescue scheme for foreign
currency-denominated (FX) mortgage borrowers, initiallydrawing criticisms from international investors and the
media. Funds generated by the special tax and thetransfer of private pension assets were mainly used forfiscal consolidation and other economic measures. The
rescue scheme for FX mortgage borrowers put a heavy
burden on banks, but it contributed a great deal toIssuer Reportresolving their longstanding issue. On the other hand, it
has introduced a new media law that restricts media
activities, its own refugee policy, and more recently,
discriminatory policies against the LGBT. These havebeen criticized by the EU for violating EU law. In
December 2020, the EU adopted compliance with the"rule of law" as a condition for disbursing the 2021-2027
EU fund and Recovery Fund. However, the European
Court of Justice will decide whether or not the "rule oflaw" is being threatened. Given the high level of public
support for EU and the importance of EU funds forfurther economic development, the administration is
expected to find a way out after the general election.
The country had already established high-level political,
social and economic systems in the EU accession process
and the inflow of foreign direct investment continues
growing in volume. JCR holds that an impact of this issue
will be limited unless it leads to a substantial reductionof EU fund disbursements.

emissions reduction are progressing as planned.
With a view to ensuring an economic revival after thefinancial crisis, the Orban administration has madeutmost efforts to put an end to the country’s structuralproblems such as a weak financial system, a low
employment rate and large government and external
debts. The country’s financial system has markedly
improved as a result of the implementation of a rescue
scheme to help households convert their foreign
currency mortgage loans to forint-denominated ones.
The government's employment promotion measures
have been successful in substantially raising theemployment rate, with the unemployment rate falling toa record low in 2019. Prior to the pandemic, both thegovernment debt and the external debt at the end of2019 in GDP terms had fallen to the levels significantly
lower than before the financial crisis. The government’s
debt structure also improved as liabilities denominatedin foreign currency and those held by nonresidents
declined in volume. The administration has also
promoted introduction of FDI to automobile and otherindustries. The outstanding balance of FDI (IIP) at theend of 2020 reached around 80% of GDP. After its
accession to the EU, Hungary has been receiving asubstantial amount of transfers from the EU funds. The
government has been upgrading the country’s social
infrastructure by effectively using them. Hungary
received EUR25 billion (25% of nominal GDP in 2007)
between 2007 and 2013 and more than EUR22 billion(21% of nominal GDP in 2014) between 2014 and 2020.
The country's economic structure is now highly
dependent on exports and investment, with exports byautomobile and other manufacturing industries
accounting for 90% of real GDP in 2020 and investment
for 26%. Global automakers and parts manufacturers
mainly from Germany have set up their facilities in
Hungary. The automotive industry has become one ofmajor industries accounting for close to 30% of thecountry’s total industrial output and 20% of exports.
Hungary is also becoming one of the biggest battery
producers amid the growing demand for electric vehicles
in European countries.

Economic base
Hungary has a relatively advanced and exportoriented economic structure centering on theautomotive and chemical industries. Its per capita GDP(in ppp terms) exceeded USD 33,000 in 2020, which ishigher among the sovereigns rated in the A range by JCR.
Since the early 1990s, the country has proactively
introduced FDI mainly from other European countries
and deepened its economic relationship with thosecountries through international trade and finance.
Around 90% of exports were bound for the European
countries with Germany accounting for nearly 30%. The
country is deeply integrated into the supply chain ofEuropean countries, in particular Germany.
In terms of energy sources, the country is highly
dependent on imports, with fossil fuels accounting forabout 70% of consumption, renewable energy for over
10%, and nuclear power for more than 15%. Fournuclear power plants are currently in operation, and two
new plants are scheduled to be operational by the endof 2030. In 2018, the government formulated The
Second National Climate Change Strategy and is working
on measures to combat climate change. The goal is to
reduce greenhouse gas emissions by 40% from 1990
levels by 2030, increase the share of renewable energy
in final consumption to minimum 21%, and becomecarbon neutral by 2050. At present, greenhouse gas

Current economic condition
Prior to the pandemic, the annual economic growth
rates for the period from 2017 to 2019 had averaged
4.8%, driven by domestic demand, one of the highest in<2>Issuer Report
the EU, and the unemployment rate had fallen to arecord low while prices had risen only moderately. The
current account balance had been either in surplus or
marginal deficit, and both the external debt and net
external debt (IIP), while still high relative to GDP, hadsignificantly shrunk, helping to strengthen the economic
foundation. When the pandemic began in the spring of
2020, the government declared a state of emergency at
an early stage and enforced movement restrictions. In
the April-June quarter of 2020, the economy contracted
a sharp 13.0% from a year earlier. The pandemic
resurged after that, but the effects of massive economic
measures and resumption of economic activities eased
its impact, with the economic contraction in the entire
2020 abated to 4.7%. The economic measures by thegovernment and the central bank, equivalent to about
30% of GDP, were one of the largest in the EU. Abouthalf of them was fiscal spending such as maintenanceand creation of employment, financial support forhouseholds and pensioners, and investment promotion,
the remainder being financial support.
Although the pandemic surged again in 2021, theeconomy was seen to have grown by around 6% as awhole thanks to the effect of the economic measuresand accelerated resumption of economic activities. As
the government consumption underpinned the economy,both investment and exports have been expanding since
the end of 2020 with consumer spending recovering
since the April-June quarter of 2021. Yet production andexports mainly in the automotive industry were
adversely affected by supply constraints in the JulySeptember quarter of the year although the production
gradually resumed later. The size of real GDP in the AprilJune quarter of 2021 recovered to the level before thepandemic. JCR holds that the economy will grow byaround 4% in 2022 and by around 3-4% in the medium
term, given the country's economic foundation that has
been strengthened so far, the continued effect of theeconomic package and a large inflow of money from theEU funds and its recovery fund.

companies and households has been growing since 2017
thanks to lower interest rates and the incentive
measures adopted by the government and the central
bank. The bank lending kept a double-digit growth in2020 on the financial support measures aimed tomitigate the impact of the pandemic. Banks reported alower profit in 2020 as their higher operating income
was offset by increased loan-loss provisions. While
securing solid net interest income on the growth oflending despite the lower interest rate environment,
they boosted their operating income on increased noninterest income centering on commissions. They
contained their operating expenses, but loan-loss
provisions surged in volume to cover risk assets. Theirnonperforming loan (NPL) ratio fell from 3.4% at the endof June 2021 to 3.0% at the end of September 2021 andtheir capital adequacy ratio stayed high at 19.1% at theend of June 2021.
To mitigate the impact of the pandemic, thegovernment has implemented financial support
measures such as a debt repayment moratorium andloan guarantees, and the central bank has carried out
monetary easing, asset purchase programs and liquidity
support measures for banks. The government enforced
the moratorium for households and nonfinancial
corporate borrowers in March 2020 and extended a
portion of it for vulnerable sectors by the end of June
2022 for those borrowers who are still suffering from theimpact of the pandemic. Banks have already built up
their loan-loss provisions to cover high-risk loans. In thefirst nine months of 2021, their pre-tax profit doubled
from the year earlier as operating income continued
expanding while provisioning for loan losses was cut
significantly. Their NPL ratio declined further to 3.4% at
the end of September 2021, with their capital adequacy
ratio kept high at 18.1%. After the expiry of themoratorium, banks may require an additional buildup ofprovisions. However, JCR believes that they will be fully
able to absorb them with their pre-provision profits.

Resilience to external shocks
Financial System

The country’s gross external debt and net externalliabilities (IIP) remain large as compared with those ofother sovereigns rated in the A range by JCR. However,they were cut to around 80% and below 50% of GDP,
respectively, at the end of 2020, which were significantly

Hungary’s financial system has been kept stable, withbanks staying fully resilient to risks. The outstandingbalance of bank loans stood low at around 60% of GDP
at the end of 2020, but the lending to nonfinancial<3>Issuer Reportlower than their 2009 peaks. The current accountbalance had been in surplus since 2010 on increased
exports stemming from enhanced production capacities
especially in the automotive industry. However, itslipped into a modest deficit in 2019 and 2020.
Increased imports driven by strong domestic demandcaused a larger trade balance deficit in 2019. In 2020,
the service balance involving tourism ended up with areduced surplus due to the movement restrictions
forced by the pandemic. Nonetheless, Hungary
continued to enjoy a net capital influx thanks tocontinuing inflows of EU funds. The modest current
account deficit continued in the January-September
period of 2021 despite the recovery of imports andexports since the end of 2020. The foreign currency
reserves (excluding gold, reserve position in the IMF andSDRs) remained high level of EUR 30.8 billion at the endof 2021 amid continued net inflows of foreign direct
investment. The balance of gross external debt and net
external liabilities at the end of September 2021
increased from a year earlier, standing at closer 90% andjust below 50% of GDP, respectively. Given theautomotive industry’s enlarging production capacity, JCR
expects that exports will expand and the current accountbalance will return to surplus once the impact of thepandemic recedes.

Fiscal base
The general government fiscal deficit (ESA 2010) had
been constantly kept below 3% of GDP from 2012 to2019 in line with the reduction of the government debtGDP ratio. The debt structure also improved as thegovernment ramped up funding in local currency fromhouseholds and banks, sharply reducing the ratios ofdebt owed to nonresidents and foreign currencydenominated debt to the total. The government had
initially planned to cut its fiscal deficit in GDP terms from2020 onward. However, the deficit in the year widened
to 8.0% due to the massive economic package aimed tomitigate the impact of the pandemic and a slower
growth of tax revenues caused by the economic
contraction. The total package provided by thegovernment and NBH was worth about 30% of GDP, ofwhich around a half was fiscal expenditures. The general
government debt rose sharply to 80.1% of GDP at theend of 2020 from 65.5% a year earlier. The government
was forced to apply the exemption clause in the law that<4>

obliges it to reduce the debt in budget formulation.
The budget deficit was estimated to have narrowed
slightly to around 7% of GDP in 2021 due to the
reduction of the economic stimulus measures andincreased tax revenues brought by the economic
recovery, with the government debt seen to have been
cut to less than 80% of GDP. The government plans tocontinue fiscal consolidation and curb its debt from 2022
onward. The country's law obliges the government to
cut the debt ratio in budget compilation when it
exceeded 50% of GDP. Given the government's strong
commitment backed by the legal obligation and its trackrecords, JCR holds that fiscal consolidation will continue
to make headway after the general election in April 2022
onward. There has been no major change in thegovernment debt structure, but the average debt
maturity has exceeded six years partly due to theissuance of long-term foreign currency-denominatedbonds. In 2020, based on its green bond framework, thegovernment issued its first green bonds in euros and yen.
It was the first such bond in yen by a foreign government.
In 2021, the government issued long-term US dollar andeuro bonds and green RMB bonds.

Overall assessment and outlook
The ratings are mainly supported by the country’s
developed and export-oriented economic structure,strengthened economic and fiscal base brought byappropriate economic policies and stable banking
system. On the other hand, they remain constrained by
its relatively large external and government debts in GDP
terms. The rating outlook of the rating is Stable. Largescale economic measures have been implemented inorder to mitigate the impact of the pandemic. As a result,although the public finance deteriorated significantly,
real GDP and employment recovered to pre-pandemic
levels in the first half of 2021. While the future outlook
remains uncertain due to supply constraints and apossible resurgence of the pandemic, both economic
and fiscal bases are becoming more resistant to shocks.
The current government is highly likely to be re-electedin the general election in April 2022, and as the economy
continues to recover, the government will continue topromote fiscal consolidation.
Promotion of an early sustainable economic recovery
through measures to ensure living with COVID-19 and acontinued reduction of the government and external

Issuer Reportdebts in GDP terms would be positive factors for the
ratings. On the other hand, the ratings will come under
downward pressure if a prolonged pandemic, asubstantial reduction of EU fund allocations resulting
from sanctions, and emergence of geopolitical risks havematerial impacts on the economy and public finance.

<5>Issuer Report

12038

Hungary●Selected Economic and Fiscal indicators

2016
Nominal GDP

2017

2018

2019

2020

USD billion

128.7

143.2

160.6

163.5

155.8

Population

million

9.8

9.8

9.8

9.8

9.8

Per capita GDP(PPP)

USD

27,94829,501

31,86333,96233,253

Real GDP growth rate

%

2.2

4.3

5.4

4.6

-4.7

Consumer price inflation

%

0.4

2.4

2.8

3.4

3.3

Unemployment rate

%

5.1

4.2

3.7

3.5

4.3

General government revenues/GDP

%

45.0

44.3

44.0

43.6

43.6

General government expenditures/GDP

%

46.8

46.7

46.1

45.7

51.6

General government balance/GDP

%

-1.8

-2.5

-2.1

-2.1

-8.0

General government debts/GDP

%

74.9

72.2

69.1

65.5

80.1

Current account balance/GDP

%

4.5

2.0

0.2

-0.7

-1.6

External debts/GDP

%

95.4

83.1

79.1

72.4

80.0

External debts/Export Goods & Service

%

110.4

96.7

94.5

88.6

100.7

International reserves/Monthly import Goods &Service

Times

3.2

2.7

2.9

2.7

3.6

International reserves/Short-term external debts

Times

1.8

1.9

2.1

2.1

1.9

(Sources) Hungarian Statistical Office, National Bank of Hungary, and Eurostat● Ratings
Rating Outlook*

Amount(millions)

Currency Rate (%) Issue Date Maturity Date

Release

Foreign Currency Long-term Issuer Rating

A-

Stable

-

-

-

-

-

2022.01.31

Local Currency Long-term Issuer Rating

A

Stable

-

-

-

-

-

2022.01.31

Japanese Yen Bonds-Seventh Series(2020)

A--

22,700JPY

0.52

2020.09.18

2023.09.15

2022.01.31

Japanese Yen Bonds-Eighth Series(2020)A--

20,000JPY

0.74

2020.09.18

2025.09.18

2022.01.31

Japanese Yen Bonds-First
Series(2020)(Green Bonds)

A--

15,500JPY

1.03

2020.09.18

2027.09.17

2022.01.31

Japanese Yen Bonds-Second
Series(2020)(Green Bonds)

A-

-

4,500

JPY

1.29

2020.09.18

2030.09.18

2022.01.31<6>

Issuer Report● History of Long-term Issuer Rating(Foreign Currency Long-term Issuer Rating or its equivalent)

Date

RatingOutlook*

Issuer

1996.08.02

BBB+

-

Hungary

1999.11.25

A--

Hungary

2003.05.16

A

StableHungary

2006.10.04

A-

StableHungary

2008.10.21#A-

Negative

Hungary

2008.12.18

BBB+

Negative

Hungary

2010.03.05

BBB+

StableHungary

2011.03.31

BBB+

Negative

Hungary

2012.04.03

BBB

Negative

Hungary

2014.03.18

BBB

StableHungary

2016.02.17

BBB

Positive

Hungary

2017.02.21

BBB+

StableHungary

2019.03.27

BBB+

Positive

Hungary

2020.02.21

A-

StableHungary*Outlook for Foreign Currency long-term issuer rating, or direction in case of Credit Monitor.

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