April 15, 2019

12038

Hungary
Chief Analyst
xxxxx Analyst

Toshihiko Naito
Haruna Saeki

Long-term Rating

BBB+

Outlook*Positive

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

1. Overview
Hungary is one of the medium-sized economies inCentral and Eastern Europe (CEE) with a nominal GDP
exceeding USD 155 billion and a population of about 9.8
million in 2018. Since its economic transition in the early
1990s, the country had pushed economic reforms andproactively introduced foreign direct investments (FDI)
well ahead of other CEE countries. It joined NATO in
1999 and was approved to accede 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 exportoriented. After the outbreak of the global financial crisis
in 2008, the country was forced to receive IMF/EU
financial assistance totaling EUR20 billion (18% of GDP in2008) amid its ballooning external and government
debts brought by chronic current account and fiscal
deficits. Since taking office in May 2010, the Viktor
Orban administration has been capitalizing on its strong
political base to push ahead with an unconventional
policy to pull out the country from the prolonged
economic slump. The policy has proved effective inovercoming the country's longstanding structuralproblems, reviving the economy and solidifying its
economic structure.

Socio-political condition and economy policy
Since the country's first free election was held in 1990,
parliamentary democracy has been functioning as
exemplified by a multi-party system and change ofadministration. In the process of its EU entry negotiation,
Hungary had to make a major review of its political,
economic and fiscal systems. New systems in conformity<1>with the EU standards have been put in place to ensure
political and social stability. In the general election heldin the spring of 2010, the alliance of conservative rightwing Fidesz-Hungarian Civic Union and the Christian
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 theApril 2018 elections, the alliance retained its two-third
majority, allowing Prime Minister Orban to remain in
power.
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 unconventional policies including
introduction of a special tax targeted at specificindustries, transfer of private pension assets to thegovernment 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 mortgage borrowers put a heavy
burden on banks, but it contributed a great deal toresolving the 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. The EU warned thatboth laws are incompatible with its legislation. The

Issuer Reportongoing dispute between the EU and the Hungarian
government continues over the asylum policy andjudicial reforms. Nonetheless, the country had alreadyestablished high-level political, social and economic
systems in the EU accession process. Unless the issues
will lead to substantial reduction of the EU fund, theirimpact is likely to be limited.

and the central bank. In 2014, the economy grew 4.2%
on a recovery of consumer spending. While theeconomy slowed down in 2015 and 2016 on weaker
public investment resulting from a reduced inflow of EU
funds, it accelerated to 4.1% in 2017 and 4.9%
(preliminary) in 2018, led by robust consumer spending
and increased investment resulted from resumed inflow
of new EU funds (2014-2020) amid economic slowdown
of European economy in 2018. Increased employment, ahike of the minimum wage and tax cuts contributed to
expanding consumer spending. Investment continued adouble-digit growth thanks to the effect of projects
related to EU funds (allocated between 2014 and 2020)and housing subsidy scheme pushed by the government.
Household and corporate debts remained subdued. The
labor market is tightening marked by a record-low 3.7%
unemployment rate in 2018. The core CPI inflation has
been rising to around 3.0%, but inflation has been
contained to some extent by higher productivity.
Investments have continued to be made in expanding
the capacity of the automobile-related industries,
contributing to the growth of exports and theimprovement of productivity considerably. JCR expects
that the economy will slightly decelerate on a slower
European economy, labor shortages in some sectors andnormalization of monetary policies, but it will sustain anannual growth rate of around 3% over the coming years.

3. Economic base
Hungary has a relatively advanced and exportoriented economic structure centering on theautomotive and chemical industries. Its per capita GDP(ppp) estimated to have reached around USD 30,000 in
2018, which is the highest among the sovereigns rated in
the BBB 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 through international
trade and finance. The outstanding balance of FDI (IIP) atthe end of 2018 was around 80% of GDP. Along with thistrend, the ratio of exports to nominal GDP has risen
close to 90% in 2018, the second highest after Slovakia
among the CEE countries. Around 90% of exports werebound for the European countries with Germany
accounting for close to 30%. The country is deeply
integrated into the supply chain of European countries
and is becoming more susceptible to economic conditionof those countries. After its accession to the EU, thecountry has been receiving a substantial amount oftransfer from the EU funds. The government has been
upgrading the country's social infrastructure byeffectively using them. The country was entitled toreceive EUR25 billion or 25% of GDP (in 2007) between
2007 and 2013 and EUR22 billion or 21% of GDP (in2014) between 2014 and 2020.

5. Financial System
The country's financial system continues improving.
The outstanding balance of bank loans remains low ataround 50% of GDP, but keeps growing mainly led by
nonfinancial corporation. Banks maintained substantial
profits in 2018 despite moderate decline of pretax
profits from a year earlier. While securing solid net
interest income on the growing lending to private sector
amid lower interest rate environment, banks boosted its
operating income on the robust non interest income
mainly led by commission. Operating expenses increased
somewhat, but loan loss provision fell sharply. They stayfully resilient to risks, with their nonperforming loan
ratio cut to around 2% and capital ratio boosted tonearly 20% at the end of 2018. EU-wide Stress test
conducted by European Banking Authority disclosed theresults in November 2018. The country's largest bank,
OTP was a sole bank to participate the exercise in
Hungary. The results showed the bank will be able toretain solid capitalization to adverse shocks.

4. Current economic condition
Annual average real GDP growth rate exceeded 4% in
the early 2000s but contracted to the annual average of 1% between 2008 and 2012 due mainly to the outbreakof the financial crisis. In addition to the setback ofexports caused by weak global demand, consumer
spending and investment plunged amid intensified
reduction of swollen debts mainly owed by households
and banks. The economy started recovering in late 2013
on expanded public investment prompted by a massive
inflow of EU funds and a pickup of exports as well as the
economic measures implemented by the government<2>Issuer Report

6. External position
The country's external debt remains large as comparedwith those of other sovereign governments rated in the
BBB range by JCR. However, it shrank to 81.2% of GDP at
the end of 2018 from 148% at the end of 2009 mainly led
by the banking sector. The ratio now returned to the level
before the financial crisis in 2008-2009. The current
account balance turned around into surplus in 2010. The
surplus narrowed in 2018 as imports grew on strong
domestic demand, but it stayed in a surplus equivalent to
0.5% of GDP. Given the automotive industry's enlarging
production capacity including electric vehicles and electricmotors, the balance may remain in surplus barring
deterioration of the EU economy. The country's externalliquidity stays stable thanks to increased inflows of EU
funds despite narrowed current account surpluses in 2018.
Furthermore, the government, banks and households
have been cutting back on their foreign currencydenominated debts and external debts. This should help
reduce the country's vulnerability to external shocks.

7. Fiscal base
Capitalizing on its stable political base, thegovernment has been implementing a series of fiscal
consolidation packages aimed to cut its growing debt
since the beginning of 2011. The government also set a
constitutional cap on public debt with an aim to containits fiscal debt. The general government fiscal deficit (ESA2010) has been kept below 3% of GDP since 2012. The
ratio in 2018 declined to around 2.2% (preliminary),slightly lower than the budget target. Budget
expenditures were increased moderately before thegeneral election in 2018, but they were more than offset
by increased VAT and personal income tax revenues
brought by the economic expansion. The government
remains committed to contain its fiscal deficit below 3%
of GDP from 2019 onward. Its 2019 budget plan
envisages cutting the ratio to 1.8% and set aside
reserves to provide for contingency. The ratio of thegeneral government debt (ESA 2010) to GDP stayed stilllarge at 70.8% (preliminary) at the end of 2018, but had
been continuously declining from 80% at the end of
2011. The composition of the debt has also improved as
the government ramped up implementation of its SelfFinancing Program with a focus on funding in local
currency on the domestic market centering on
households and banks. Its resilience to external shocks
kept improving, with the ratios of the government debt

<3>

owed to nonresidents and foreign currencydenominated debt to the total slashed to 36% and 20%,
respectively, at the end of 2018 from 66% and 40% at
the end of 2012.

8. Overall assessment and outlook
The ratings mainly stem from the country's developedand export-oriented economic structure, the advanced
stage of structural reforms and a significant reduction ofvulnerability to external shocks. On the other hand, theratings remain constrained by the large external andgovernment debts, though they have been constantly
shrinking in terms of GDP. The economic measures
implemented by the government and the central bankhave been proving effective in overcoming the country's
structural problems such as a week financial system, alow employment rate and large government andexternal debts. Inflation remains contained as a sharp
rise of wages resulting from tightening labor market andincrease in minimum wage has been partly offset by
improved productivity. Public finance continues
improving on increased tax revenues on robust
economic expansion led by the domestic demand. The
external debt also continues shrinking on a consistentcurrent account surplus. The current slowdown ofEuropean economy, a tightening labor market andnormalization of monetary policy weigh on the future
growth rate, but the economy is likely to return to morestable growth rate around 3% in the years ahead. In
these environments, JCR expects that the government
and external debts will continue shrinking. All thesethings considered, JCR decided to change the rating
outlook to Positive.
Further reduction of government debt and external
debts in terms of GDP will be positive for the ratings.
Meanwhile, deterioration of external environment
mainly EU economies, failure to ease tightening of labormarket and substantial reduction of allocation of EU
fund are likely to have a negative impact on the ratings,
because these will be considerable downward pressure
on the economy.

Issuer Report

12038

Hungary●Selected Economic and Fiscal indicators

2014
Nominal GDP

2015

2016

2017

2018

USD billion

140.1

123.0

126.0

139.8

155.7

Population

million

9.9

9.9

9.8

9.8

9.8

Per capita GDP(PPP)

USD

25,51826,18926,741

28,21530,150Real GDP growth rate

%

4.2

3.5

2.3

4.1

4.9

Consumer price inflation

%

-0.2

-0.1

0.4

2.4

2.8

Unemployment rate

%

7.7

6.8

5.1

4.2

3.7

General government revenues/GDP

%

46.9

48.2

45.1

44.7

44.2

General government expenditures/GDP

%

49.5

50.1

46.8

46.9

46.5

General government balance/GDP

%

-2.6

-1.9

-1.6

-2.2

-2.2

General government debts/GDP

%

76.7

76.7

76.0

73.4

70.8

Current account balance/GDP

%

1.5

2.8

6.2

2.8

0.5

External debts/GDP

%

114.7

107.6

97.4

85.1

81.2

External debts/Export G&S

%

130.9

120.9

108.5

96.5

93.1

International reserves/Monthly import G&S

Times

4.8

4.1

3.2

2.8

3.0

International reserves/Short-term external debts

Times

2.1

2.1

1.8

2.0

2.2

(Sources) Hungarian Statistical Office, National Bank of Hungary, and EIU● Ratings(millions of yen)

RatingOutlook*AmountRate (%)

Issue Date

Maturity Date

Release

Foreign currency long-term issuer rating

BBB+

Positive

-

-

-

-

2019.03.27

Local currency long-term issuer rating

A-

Positive

-

-

-

-

2019.03.27

Japanese Yen Bonds-Sixth Series (2018)

BBB+

-

0.37

2018.03.22

2021.03.22

2019.03.27

30,000● 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*Outlook for long-term issuer rating, or direction in case of Credit Monitor<4>Issuer ReportJapan Credit Rating Agency, Ltd.
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