March 9, 2020

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.

1. Overview
Hungary is the medium-sized economy in Central andEastern Europe (CEE) with a nominal GDP exceeding USD
160 billion and a population of about 9.8 million in 2019.
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. Since
taking office in May 2010, the Viktor Orban
administration has been capitalizing on its strong
political base to push ahead with unconventional
policies to pull out the country from the prolonged
economic slump after the global financial crisis. The
policies have proved effective in overcoming thecountry’s longstanding structural problems, reviving the
economy and solidifying its economic base.

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 heldin the spring of 2010, the alliance of conservative right-<1>

wing 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 FX 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
dispute between the EU and the Hungarian governmentIssuer Reportcontinues over the asylum policy and judicial reforms.
Nonetheless, the country had already established highlevel political, social and economic systems in the EU
accession process. Unless the issues will lead to
substantial reduction of allocation of the EU fundbetween 2021 and 2027, their impact is likely to belimited.

The economy is changing to more export and investment
oriented as the shares of exports and investment in real
GDP surged to around 110% and 28% at the end of 2019.
According to financial account in Hungary, net financial
worth of households continues growing amid decreasing
net external debt. Global automotive manufacturers andparts companies mainly from Germany have set up theirfacilities in Hungary. Auto industry has become one ofmajor industries and generates approximately 30% of
the country’s total industrial output and 20% of exports.
It is said that the efficiency of the country’s automotive
OEM facilities is higher than those in other countries
outside Germany. The country is also becoming one of
the largest battery producing countries to meet growing
demand of electric vehicles in European countries. These
measures and efforts were proved to be effective tostrengthen the country’s economic base.

3. Economic base
Hungary has a relatively advanced and exportoriented economic structure centering on theautomotive and chemical industries. Its per capita GDP(ppp) has already reached around USD 30,000 in 2018,
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. Nowadays around 90%
of exports were bound for the European countries withGermany accounting for close to 30%. The country is
deeply integrated into the supply chain of European
countries, in particularly Germany.
In view of reviving from the prolonged economic
slump after the financial crisis, the Orban administration
has almost put an end to the country’s structuralproblems such as a week financial system, a low
employment rate and large government and external
debts, the economy has been expanding mainly led bydomestic and external demand. Significant improvementof the country financial system has provided banks withmore capacity to lend loans to private sector. A surge in
employment rate has supplied more employment in theeconomy. The government debt in compared with GDP
fell to the levels before the financial crisis and its
structure also improved with the shares of Foreignexchange denominated and nonresident holding being
declined. The administration has also promoted toincrease foreign direct investment. As of end 2019, theoutstanding balance of FDI (IIP) was estimated at around
80% of GDP. 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.

4. Current economic condition
The economy stagnated between 2008 and 2012 due
mainly to outbreak of the financial crisis, but started
recovering in late 2013 on expanded public investment
prompted by a massive inflow of EU funds and a pickupof exports as well as the economic measures
implemented by the government and the central bank.
In 2014, the economy grew 4.2% on a recovery of
consumer spending. While the economy slowed down in2015 and 2016 on weaker public investment resulting
from a reduced inflow of EU funds, it accelerated to
4.3% in 2017, led by robust consumer spending andincreased investment resulted from resumed inflow of
new EU funds (2014-2020).
The economic growth rate reached around 5% in2018 and 2019 mainly driven by the robust domestic
demand and solid export amid slowdown of European
economy. The growth rate in 2019 was the second
highest after Ireland among EU member countries.
Increased employment, a hike of the minimum wage andtax cuts contributed to expanding consumer spending.
Investment continued a strong growth thanks to private
investment, public investment related to EU funds(allocated between 2014 and 2020) and housing
investment on the subsidy scheme pushed by thegovernment. The labor market is tightening marked by arecord-low 3.4% unemployment rate in 2019 amid thecontinued rise in employment rate. Consumer priceinflation rose to 3.4% in 2019 reflecting a steep increase<2>

Issuer Reportof wages resulting from a labor shortage and a hike ofthe minimum wage, but has been partially curbed byhigher productivity. The economy will slightly decelerate
on a slower European economy, a labor shortage andnormalization of monetary policies. However, an annual
growth rate of around 3-4% will be sustained over the
coming years on expanded production capacity resulting
mainly from increased investment in automotive
segments. JCR will monitor how EU funds will beallocated to member countries under the 2021-2027
budgets.

balance had posted surpluses since 2010 on increased
exports driven by higher production capacity especiallyin the automotive industry. However, it turned aroundinto marginal deficits below 1% of GDP both in 2018 and2019 reflecting increased imports driven by strong
domestic demand. Given the automotive industry’s
enlarging production capacity, the balance may return tosurplus with slowdown of domestic demand. As forexternal liquidity, the country stays as net lender
position thanks to increased inflows of EU funds despite
marginal current account deficit in 2019.

7. Fiscal base

5. Financial System
The country’s financial system has shown marked
improvement after implementation of a rescue scheme
for FX mortgage borrowers in 2014. The earnings
performance of the banks were initially forced toregister a huge loss due to higher provisioning, but
continues to improving after the introduction of rescue
scheme. The outstanding balance of bank loans remains
low at around 50% of GDP, but lending to nonfinancial
cooperation and households has been growing in 2017
and showed two digit growth rate in 2018 and 2019
thanks to lower interest rates and the incentive
measures adopted by the government and the central
bank. Banks were estimated to have made anotherrecord profit in 2019 on increased operating income andreduced loan-loss provisions. 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 and loan
loss provision were contained. Banks stay fully resilient
to risks, with their nonperforming loan ratio cut to below
5% and capital ratio boosted to around 18% at the endof 2019. House prices are rising in urban areas, but JCR
views that this is not an immediate concern becausehousehold debts still stay low in GDP terms with the LTV
ratio kept at low levels.

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 2019 was estimated at around 2%, almost on parwith the budget target. The good performance camefrom continuing spending curbs and increased VAT andpersonal income tax revenues brought by the economic
expansion. The government is committed to reducing its
fiscal deficit in GDP terms from 2020 onward. Its 2020
budget plan envisages cutting the ratio to 1% and setsaside reserves equivalent to 1% of GDP to provide forcontingency. The ratio of the general government debt
(ESA 2010) to GDP was estimated to have fallen below
70% at the end of 2019 for the first time since 2007. The
ratio is likely to fall to the average for sovereigns rated in
the A range by JCR within a few years. The debt
composition is improving as the government ramps up
funding in local currency on the domestic market
centering on households and banks under its SelfFinancing Program. The ratios of the government debt
owed to nonresidents and foreign currencydenominated debt to the total slashed to 34% and 17%,
respectively, at the end of 2019 from 66% and 40% at
the end of 2012.

6. External position
The country’s gross external debt and net externalliabilities (IIP) remain large as compared with those ofother sovereign governments rated in the A range by JCR.
However, they were estimated to shrink to below 80%
and 50% of GDP at the end of 2019. The current account<3>

8. Overall assessment and outlook
JCR upgraded Hungary’s ratings in this year’s annual
rating review. The upgrading mainly reflects thecountry's strengthened economic base resulting fromIssuer Report
the effective economic policies taken by the government
and the central bank, improved public finance brought
by a stabilizing revenue base, and shrinking government
and external debts in terms of GDP. The economy isgrowing at a relatively high annual pace of around 5% on
solid domestic demand, but may return to a more stable
growth rate of around 3-4%. Growing consumer priceinflation remains contained to some extent, with theimpact of rising wages partly offset by improving
productivity. The ratios of government and external
debts in GDP terms remain high, but are likely to keep
shrinking amid stable economic expansion.
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 increasing shortageof labor and substantial reduction of allocation of EU
fund as a sanction by the EU are likely to have a negative
impact on the ratings, because these will beconsiderable downward pressure on the economy andpublic finance.

<4>Issuer Report

12038

Hungary●Selected Economic and Fiscal indicators

2015
Nominal GDP

2016

2017

2018

2019F

USD billion

124.5

127.5

141.6

157.9

163.6

Population

million

9.9

9.8

9.8

9.8

9.8

Per capita GDP(PPP)

USD

26,66827,171

29,15931,081

32,500Real GDP growth rate

%

3.8

2.2

4.3

5.1

4.9

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

%

48.7

45.4

44.6

44.4

44.6

General government expenditures/GDP

%

50.6

47.2

47

46.7

46.6

General government balance/GDP

%

-2.0

-1.8

-2.4

-2.3

-2.0

General government debts/GDP

%

76.2

75.5

72.9

70.2

66.4

Current account balance/GDP

%

2.4

4.5

2.3

-0.5

-0.6

External debts/GDP

%

106.3

96.3

84.1

80.1

74.7

External debts/Export Goods & Service

%

120.8

110.4

96.5

94.4

90.3

International reserves/Monthly import Goods &Service

Times

4.1

3.2

2.8

3.1

3.0

International reserves/Short-term external debts

Times

2.1

1.8

2.0

2.1

1.7

(Note) Figures for 2019 are JCR projection(Sources) Hungarian Statistical Office, National Bank of Hungary, and EIU● Ratings(millions of yen)

RatingOutlook*AmountRate (%)

Issue Date

Maturity Date

Release

Local currency long-term issuer rating

A

Stable----2020.02.21

Foreign currency long-term issuer rating

A-

Stable----2020.02.21

Japanese Yen Bonds-Sixth Series (2018)

A-

-

0.37

2018.03.22

2021.03.22

2020.02.21

30,000<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

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