February 22, 2021

12038

Hungary
Chief Analyst
xxxxx Analyst

Toshihiko Naito
Haruna Saeki

Long-term RatingA-

Outlook*

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

right-wing Fidesz-Hungarian Civic Union and theChristian Democratic People’s Party won a two-third
majority. Prime Minister Orban formed his second
administration following the first one in 1998. In the
April 2014 and April 2018 elections, the alliance retained
its two-third majority, allowing Prime Minister Orban toremain in power. His administration has been praised forits prompt response to the COVID-19 pandemic, andcurrently maintains a high approval rating.
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 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. The fund generated by the special tax and thetransfer of private pension assets was 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 toresolving their longstanding issue. The government also
enacted a new media law that regulates media activity
and a new Central Bank Act that limited the
independence of the central bank, and adopted its own

Overview
Hungary is a medium-sized economy in Central andEastern Europe (CEE) with a nominal GDP exceeding USD
163 billion and a population of about 9.8 million in 2019.
Since its economic transition in the early 1990s, thecountry has pushed economic reforms and proactively
introduced foreign direct investments (FDI) well aheadof other CEE countries. It joined NATO in 1999 andacceded to the EU in 2004. As Hungary strengthened its
ties with other European countries through international
trade and finance, its economic structure has grownincreasingly 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 initially deemed to be unconventional topull out the country from a prolonged economic slump
after the global financial crisis. These policies have
proved effective in overcoming the country’s
longstanding structural problems, reviving the economy
and solidifying its economic and fiscal bases.

Socio-political condition and economy policy
Since the country’s first free election held in 1990,
parliamentary democracy has been functioning as
exemplified by a multi-party system and frequentchange of administration. In the process of its EU entry
negotiations, Hungary had to make a major review of its
political, economic and fiscal systems. New systems inconformity with the EU standards have been put in place
to ensure political and social stability. In the generalelection held in April 2010, the alliance of conservative<1>

Issuer Reportasylum policies. The EU warned or ruled that thesepolicies are incompatible with its legislation. 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, but its specific operation has
not been determined yet. Nonetheless, the country had
already established high-level political, social andeconomic systems in the EU accession process.
Economic impact of this issue is likely to be limited
unless it leads to a substantial reduction of EU funddisbursements.

Economic base
Hungary has a relatively advanced and exportoriented economic structure centering on theautomotive and chemical industries. Its per capita GDP(in ppp terms) has already reached around USD 34,000
in 2019, which belongs to the highest group among thesovereigns 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 those countries throughinternational 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 of European countries,
in particular Germany.
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 torecord low. Both the government debt and the external
debt in GDP terms fell to the levels significantly lower
than before the financial crisis. The government’s debt
structure also improved as liabilities denominated inforeign currency and those held by nonresidents
declined in volume. The administration has also
promoted introduction of foreign direct investment toautomobile and other industries. The outstanding<2>

balance of FDI (IIP) at the end of 2019 reached around
80% of GDP. After its accession to the EU, Hungary has
been receiving a substantial amount of transfers fromthe EU funds. The government has been upgrading thecountry’s social infrastructure by effectively using them.
Hungary received EUR25 billion (25% of nominal GDP in2007) between 2007 and 2013 and more than EUR22
billion (21% of nominal GDP in 2014) between 2014 and2020. The country's economic structure is now highly
dependent on exports and investment, with exports byautomobile and other manufacturing industries
accounting for 92% of real GDP in 2019 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. Its
automotive OEM facilities are said to boast one of thehighest production efficiencies outside Germany.
Hungary is also becoming one of the biggest battery
producers amid the growing demand for electric vehicles
in European countries.

Current economic condition
Hungary's annual real GDP growth rates averaged
4.8% between 2017 and 2019 led mainly by domestic
demand, which was relatively high among the EU
member countries. The economy kept growing at a highrate in 2019 although the growth rate itself decelerated
to 4.6% from 5.4% in 2018 on slower domestic demand.
Increased employment, a hike of the minimum wage andtax cuts contributed to expanding consumer spending.
Investment continued a strong growth led by private
investment, public investment related to EU funds(allocated between 2014 and 2020) and housing
investment prompted by a government subsidy scheme.
The labor market is tightening as the country attained afull employment in 2019, with the unemployment ratefalling to record 3.4% amid a moderately rising inflation.
Following the COVID-19 pandemic in the spring of
2020, the government declared a state of emergency at
an early stage and enforced movement restrictions. The
state of emergency was lifted in June along withrelaxation of the movement restrictions. In the AprilJune quarter of 2020, the economy contracted 13.6%
year-on-year due to the impact of the movement
restrictions. After that, a second wave of the pandemic

Issuer Reportbegan in late August, but it has almost been contained at
the moment. The economy has kept recovering from the
sharp fall in the April-June quarter on resumption of
economic activity and the implementation of thegovernment's large-scale economic package. Its real GDP
shrank 5.5% in the January-September period, which
was moderate as compared to the entire EU's 7.0%
setback. Given the impact of the second wave, theeconomy is estimated to have contracted around 6% in2020 as a whole. JCR expects that the growth rate will
recover to around 4% in 2021 and remain in the 3-4%
range in the medium term backed by a large inflow ofmoney from the EU fund and its recovery fund as well as
the country's strengthened economic base and theeffect of the massive economic package.

Financial System
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 2019, but the lending to nonfinancial
companies and households began growing in 2017,
registering a double-digit growth rate since 2019 thanks
to lower interest rates and the incentive measures
adopted by the government and the central bank. Banks
reported a record-high profit in 2019 on increased
operating income and reduced loan-loss provisions.
While securing solid net interest income on the growthof lending despite the lower interest rate environment,
banks boosted their operating income on increased noninterest income centering on commissions. They
contained their operating expenses and loan-loss
provisions at low levels. Their nonperforming loan (NPL)
ratio fell to 4.1% (3.5% for private-sector loans overdue
for 90 days or more) and their capital adequacy ratio
stayed high at 18.4% at the end of 2019.
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, extending it until
the end of June 2021. Banks have significantly built up
their loan-loss provisions to cover high-risk loans, andhave been able to absorb them with pre-provision

profits. Their NPL ratio declined further to 3.8% at theend of September 2020, with their capital adequacy
ratio kept high at 17.9%. After the expiry of themoratorium, their NPL ratio may go up, requiring an
additional buildup of provisions. However, JCR believes
that the banks will be able to absorb them with theirpre-provision profits.

External position
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 below 80% and 50% of GDP,
respectively, at the end of 2019, which were significantly
lower 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 equivalent to 0.2% of GDP
in 2019 on increased imports driven by strong domestic
demand. But Hungary remained a net lender thanks tocontinuing inflows of EU funds. Both imports andexports largely declined in 2020, but the current accountbalance ended with a modest surplus in the JanuarySeptember period of the year. The foreign currency
reserves increased significantly to EUR 32.2 billion until
September 2020 amid continued net inflows of foreign
direct investment. The balance of gross external debt
and net external liabilities at the end of September 2019
decreased from a year earlier. However, gross external
debt was estimated to exceed 80% of GDP, due to the
sharp contraction of the GDP. Net external liabilities
narrowed further in terms of GDP. Given the automotive
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 since 2012 andthe ratio in 2019 ended at 2.1%, almost on par with thebudget target. The good performance came fromcontinuing spending curbs and increased VAT andpersonal income tax revenues brought by the economic
expansion. The general government debt (ESA2010) at<3>Issuer Report
the end of 2019 stood at 65% of GDP, substantially downfrom the peak-time 80% in 2011. The debt structure also
improved as the government ramped up funding in local
currency on the domestic market with a focus onhouseholds and banks. The ratios of the government
debt owed to nonresidents and foreign currencydenominated debt to the total decreased sharply.
Average debt maturities were extended. The
government had initially planned to cut its fiscal deficit
in GDP terms from 2020 onward. However, the deficit in
the year is seen to have widened to around 8% due tothe massive economic package aimed to mitigate theimpact of the pandemic and a slower growth of tax
revenues caused by the economic downturn. The total
package provided by the government and NBH is worth
about 30% of GDP, of which more than a half is financial
assistance. To minimize its fiscal impact, the government
made budgetary rearrangement, withdrawal of the fiscal
reserves and increases in taxes. The general government
debt is seen to have risen again to around 80% of GDP at
the end of 2020 due to the widening of the fiscal deficit
and the sharp contraction of GDP. There has been no
major change in the government debt structure, but the
average debt maturity has exceeded five years due tothe issuance of long-term foreign currency-denominatedbonds. In 2020, based on its green bond framework, thegovernment issued its first green bond in euros and yen.
It was the first such bond in yen by a foreign government.
The government plans to promote fiscal consolidationand curb its debt from 2021 onward. In the 2021 budget,the fiscal deficit was initially set at 2.9% of GDP, but it
was revised to 6.5% due to additional economic
measures necessitated by a second wave of thepandemic and a downward revision of the economic
outlook. The ratio of general government debt to GDP isplanned to be reduced from the level at the end of 2021.
The country's law obliges the government to cut theratio under its budget when it exceeded 50% of GDP.
Given the government's strong commitment backed bylegal obligations and its track records, JCR holds that
fiscal consolidation will make headway from 2021
onward.

Overall assessment and outlook
The ratings are mainly supported by the country’s
developed and export-oriented economic structure,strengthened economic base brought by appropriate<4>

economic policies, stable banking system and improved
public finance. On the other hand, they remain
constrained by its relatively large external andgovernment debts in GDP terms. The country’s economy
and public finance have deteriorated significantly in2020 due to the impact of the pandemic and theresultant introduction of a massive economic package.
However, the country has become more resilient toshocks as its economic and fiscal bases have been
reinforced by the appropriate policies taken in the past.
Therefore, JCR holds that an economic recovery andfiscal consolidation will make progress once the impactof the pandemic recedes.
Attainment of herd immunity through vaccination, an
early economic recovery and a sustained reduction of
the government and external debts in GDP terms will bepositive factors for the ratings. In contrast, the ratings
will come under downward pressure if the pandemic
persists and the government debt further expands in
GDP terms due to an additional large-scale economic
package.

Issuer Report

12038

Hungary●Selected Economic and Fiscal indicators

2015
Nominal GDP

2016

2017

2018

2019

USD billion

125.0

128.5

143.0

160.4

163.5

Population

million

9.9

9.8

9.8

9.8

9.8

Per capita GDP(PPP)

USD

26,78527,90929,83232,08634,503

Real GDP growth rate

%

3.8

2.1

4.3

5.4

4.6

Consumer price inflation

%

-0.1

0.4

2.4

2.8

3.4

Unemployment rate

%

6.8

5.1

4.2

3.7

3.4

General government revenues/GDP

%

48.4

45.0

44.1

43.8

43.5

General government expenditures/GDP

%

50.4

46.8

46.5

45.9

45.6

General government balance/GDP

%

-2.0

-1.8

-2.4

-2.1

-2.1

General government debts/GDP

%

75.8

74.9

72.2

69.1

65.4

Current account balance/GDP

%

2.3

4.5

2.0

0.3

-0.2

External debts/GDP

%

105.9

95.5

83.2

79.4

72.4

External debts/Export Goods & Service

%

120.8

110.4

96.8

94.7

88.1

International reserves/Monthly import Goods &Service

Times

4.1

3.2

2.8

3.0

3.0

International reserves/Short-term external debts

Times

2.1

1.8

2.0

2.1

2.2

(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

-

-

-

-

-

2021.02.03

Local Currency Long-term Issuer Rating

A

Stable

-

-

-

-

-

2021.02.03

Japanese Yen Bonds-Sixth Series(2018)A--

30,000JPY

0.37

2018.03.22

2021.03.22

2021.02.03

Japanese Yen Bonds-Seventh Series(2020)

A--

22,700JPY

0.52

2020.09.18

2023.09.15

2021.02.03

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

20,000JPY

0.74

2020.09.18

2025.09.18

2021.02.03

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

A--

15,500JPY

1.03

2020.09.18

2027.09.17

2021.02.03

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

A-

-

4,500

JPY

1.29

2020.09.18

2030.09.18

2021.02.03<5>

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

Japan Credit Rating Agency, Ltd.
Jiji Press Building, 5-15-8 Ginza, Chuo-ku, Tokyo 104-0061, Japan
Tel. +81 3 3544 7013, Fax. +81 3 3544 7026
Information herein has been obtained by JCR from the issuers and other sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error as well asother factors, JCR makes no representation or warranty, express or implied, as to accuracy, results, adequacy, timeliness, completeness or merchantability, or fitness for any particular purpose,with respect to any such information, and is not responsible for any errors or omissions, or for results obtained from the use of such information. Under no circumstances will JCR be liable forany special, indirect, incidental or consequential damages of any kind caused by the use of any such information, including but not limited to, lost opportunity or lost money, whether in contract,
tort, strict liability or otherwise, and whether such damages are foreseeable or unforeseeable. JCR’s ratings and credit assessments are statements of JCR’s current and comprehensive opinion
regarding redemption possibility, etc. of financial obligations assumed by the issuers or financial products, and not statements of opinion regarding any risk other than credit risk, such as market
liquidity risk or price fluctuation risk. JCR’s ratings and credit assessments are statements of opinion, and not statements of fact as to credit risk decisions or recommendations regarding decisions
to purchase, sell or hold any securities such as individual bonds or commercial paper. The ratings and credit assessments may be changed, suspended or withdrawn as a result of changes in or
unavailability of information as well as other factors. JCR retains all rights pertaining to this document, including JCR’s rating data. Any reproduction, adaptation, alteration, etc. of this document,
including such rating data, is prohibited, whether or not wholly or partly, without prior consent of JCR.
JCR is registered as a "Nationally Recognized Statistical Rating Organization" with the U.S. Securities and Exchange Commission with respect to the following four classes. (1) Financial
institutions, brokers and dealers, (2) Insurance Companies, (3) Corporate Issuers, (4) Issuers of government securities, municipal securities and foreign government securities.

Copyright © Japan Credit Rating Agency, Ltd. All rights reserved.

<6>