March 15, 2018

12038

Hungary
Chief Analyst
xxxxx Analyst

Toshihiko Naito
Haruna Saeki

Long-term Rating

BBB+

Outlook*

StableShort-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 of
EUR113.7 billion and a population of 9.83 million in 2016.
Since its economic transition in the early 1990s, thecountry had pushed economic reforms and proactively
introduced foreign direct investments (FDI) well aheadof other CEE countries. It joined NATO in 1999 and wasapproved 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 export-oriented. Afterthe outbreak of the global financial crisis in 2008, thecountry was forced to receive IMF/EU financial
assistance totaling EUR20 billion (18% of GDP in 2008)
amid its ballooning external debt brought by chronic
fiscal and current account 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 in reviving the economy and solidifying
its 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
with the EU standards have been put in place to ensure
political and social stability. In the general election held

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in 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 election,
the alliance retained its two-third majority, allowing
Prime Minister Orban to remain in power. The next
general election is scheduled for April 2018. Latest
opinion polls indicate that the ruling parties keep a
comfortable lead over other parties amid persistentvoter support for its policies on economic revival and theimmigration issue. It looks highly likely that the coalition
will retain their majority in parliament.
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 purposes. 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

Issuer Reportand a new Central Bank Act that limits the independenceof the central bank. The EU warned that both laws areincompatible with its legislation.

recovery is the ongoing resolution of structural
drawbacks such as a weak financial system, a low
employment rate, and large government and external
debts. Total compensation of employees has been fast
growing on an increase of the minimum wage amid atightening labor market marked by a record-low 4.2%
jobless rate in 2017. Investments have continued to bemade in expanding the capacity of the automobilerelated industries, contributing to the growth of exports
and the improvement of productivity. The consumer
price inflation accelerated to 2.4% in 2017 from 0.4% in2016 on a pickup of energy prices, but the major hike ofthe minimum wage had only a limited impact. JCR
expects that the economy will slightly slow down on alower inflow of EU funds but that it will continue to growaround 3% annually. Inflation will pick up moderately on
solid domestic demand and wage increases.

3. Economic base
Hungary has a relatively advanced and exportoriented economic structure centering on theautomotive and chemical industries. Its per capita GDP(ppp) approximately US$27,000 in 2016, which is thehighest 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 thosecountries through international trade and finance. The
outstanding balance of FDI at the end of 2016 wasequivalent to approximately 90% of GDP. Along with thistrend, the ratio of exports to nominal GDP has risen
reaching 90% in 2017, the second highest after Slovakia
among the CEE countries. Around 80% of exports werebound for the EU with Germany accounting for close to30%. The country is deeply integrated into the EU’s
supply chain. After its accession to the EU, the country
has been receiving a substantial amount of transfer fromthe EU funds. The government has been upgrading thecountry’s social infrastructure by effectively using them.
The country was entitled to receive EUR25 billion or 25%
of GDP (in 2007) between 2007 and 2013 and EUR22
billion or 21% of GDP (in 2014) between 2014 and 2020.

5. Financial System
The country’s financial system experienced significant
deterioration in the aftermath of the financial crisis, but
it has started recovering stability following
implementation of remedial measures by thegovernment and NBH. After the financial crisis, theswollen FX mortgage loans drastically deteriorated in
credit quality. Banks tightened their lending to avoid
further risk taking. This deterred economic recovery.
Faced with the situation, the government converted
most of those loans into the Hungarian forint in early2015. It also set up an asset management company topurchase nonperforming commercial real estate loans
held by banks. The central bank launched its Funding for
Growth Scheme aimed to encourage banks to makemore loans to SMEs in a bid to stimulate bank lending to
the private sector. The banks were obliged to accept theconversion, lower the interest rates on loans and pay
compensation to the borrowers. This forced the banks to
set aside a significant amount of provisions, leaving
them with the largest net loss on record in 2014.
However, the transactions have helped themsignificantly ease their risks as the compensation wasapplied to reduce the principal owed by the borrowers
and almost all their mortgage loans were converted into
the local currency. The banks saw their performancerecover in 2015 and were seen to have made substantial
profits in 2017 mainly led by reversal of loan-loss
provisions. They stay fully resilient to risks, with theirnonperforming loan ratio cut to around 4% and capitalratio boosted to more than 20% at the end of September

4. Current economic condition
Annual 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 outbreak of
the financial crisis. In addition to the setback of exports
caused by weak global demand, consumer spending andinvestment plunged amid intensified reduction ofswollen 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 thestimulus measures implemented by the government andthe central bank. In 2014, the economy grew 4.2% on arecovery of consumer spending. While the economy
slowed down in 2015 and 2016 on weaker public
investment resulting from a reduced inflow of EU funds,
it accelerated to 4.0% (preliminary data) in 2017, led byrobust consumer spending and resumed inflow of new
EU funds (2014-2020). Also supporting the strong<2>

Issuer Report2017. The outstanding balance of bank loans keeps
growing despite the waning effect of the central bank’s
initiative aimed to encourage banks to make more loans.

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 close to 90% of GDP
at the end of September 2017 from 148% at the end of
2009 mainly led by the banking sector. The ratio is now
comparable to the level before the financial crisis in 20082009. The country also fully repaid IMF/EU loans at the
beginning of 2016. The current account balance turned
around into surplus in 2010. The surplus slightly narrowed
in 2017 as imports grew on strong domestic demand, but
it stayed close to 4% of GDP. Given the automotive
industry’s enlarging production capacity, the balance may
remain in surplus barring deterioration of the EU economy.
The country’s external liquidity stays stable thanks toincreased inflows of EU funds despite narrowed current
account surpluses in 2017. Furthermore, the government,
banks and households have been cutting back on theirforeign currency-denominated debts and external debts.
This should help reduce the country’s vulnerability toexternal 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 2017 was estimated at around 2%, slightly
lower than the budget target. While election measures
such as the reduction of social contribution by
employers, corporate income tax cut (the lowest rate in
the EU), and decreases in VAT on selected staple foods
as well as increased public investment were adopted in2017, the revenues surged on economic expansion andrising inflation. The government remains committed tocontain its fiscal deficit below 3% of GDP from 2018
onward. Its 2018 budget plan envisages containing the
fiscal deficit to 2.4% of GDP. It also retains reserves toprovide for contingency. The general government debt
(ESA2010) remains large, but its ratio to GDP was seen tohave declined to around 72% at the end of 2017 from<3>

80% at the end of 2011. Depending on the outcome of
the negotiation between the government and Eurostat,
the ratio will increased by 2 percentage points to around
74% due to inclusion of the debt owed by the state
owned Hungarian Exim bank. The composition of thedebt has also improved as the government ramped up
implementation of its Self-Financing Program with afocus on funding in local currency on the domestic
market, in particular households and banks. The ratios of
the central government debt owed to nonresidents andforeign currency-denominated debt to the total at theend of 2017 were slashed to 37% and 22%, respectively,from 69% and 49% at the end of 2011.

8. Overall assessment and outlook
The ratings mainly reflect the country’s relatively
advanced and export-oriented economic structure, theprogress on the structural reforms and significant
reduction of vulnerability to external shocks. On theother hand, the ratings remain constrained by the large
external and government debts, both of which haveconstantly been shrinking in GDP terms.
The rating outlook is stable. Thanks to the effective
economic measures implemented by the government,
the country is overcoming its structural problems
including a week financial system, a low employment
rate and large government and external debts. The
economy is keeping its domestic demand-led expansion,
supported by an enhanced utilization of EU funds andaccommodative fiscal and monetary policies. The fiscal
deficit has been kept subdued despite the generalelection scheduled for April 2018. The current economic
policy may well be continued even after the election as
the ruling coalition led by Fidesz-Hungarian Civic Unionis highly likely to retain its majority in parliament.
Barring marked changes in the external environments,
JCR expects that Hungary will make further
improvements on the government and external debts
amid the continuing moderate economic expansion.
Further reduction of government debt and external
debts in terms of GDP will be positive for the ratings.
Meanwhile, the continued tightening of labor market islikely to have a negative impact on the ratings. If thegovernment was unsuccessful to improve tightening
labor market and the country’s potential growth rate,
the economy is likely to slow down. In the foreseeable
future, however, public-sector employees and Hungarian
residents in foreign countries may contribute tosupplying additional labor force to the private sector.

Issuer Report
The government also has been stepping up its efforts toenhance the country’s potential economic growth rate incooperation with private sector.

<4>Issuer Report

12038

Hungary●Selected Economic and Fiscal indicators

2013
Nominal GDP

2014

2015

2016

2017E

USD billion

135

140

123

126

139

Population

million

9.9

9.9

9.9

9.8

9.8

Per capita GDP(PPP)

USD

24,46325,645

26,68927,00827,800Real GDP growth rate

%

2.1

4.2

3.4

2.2

4.0

Consumer price inflation

%

1.7

-0.2

-0.1

0.4

2.4

Unemployment rate

%

10.2

7.7

6.8

5.1

4.2

General government revenues/GDP

%

46.6

46.8

48.2

44.8

44.3

General government expenditures/GDP

%

49.3

49.5

50.2

46.7

46.2

General government balance/GDP

%

-2.6

-2.7

-2.0

-1.9

-2.0

General government debts/GDP

%

76.0

75.2

74.7

73.9

72.0

Current account balance/GDP

%

3.8

1.5

3.5

6.1

3.8

External debts/GDP

%

117.8

114.7

107.1

96.2

86.1

External debts/Export G&S

%

137.5

130.9

118.7

107.4

96.2

International reserves/Monthly import G&S

Times

5.1

4.8

4.0

3.2

2.8

International reserves/Short-term external debts

Times

2.0

2.1

2.1

1.9

1.9

(Note) Figures for 2017 are estimation made by JCR(Sources) Hungarian Statistical Office and National Bank of Hungary● Ratings(millions of yen)

RatingOutlook*AmountRate (%)

Issue Date

Maturity Date

Release

Foreign currency long-term issuer rating

BBB+

Local currency long-term issuer rating

A-

Stable----2018.03.01

Stable----2018.03.01

Japanese Yen Bonds-Sixth Series (2018)

BBB+

-

0.37

2018.03.22

2021.03.22

2018.03.14

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*Outlook for long-term issuer rating, or direction in case of Credit Monitor<5>Issuer ReportJapan Credit Rating Agency, Ltd.
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