A slightly surprising upgrade from Moody's

HUNGARY - In Brief 26 Sep 2021 by Istvan Racz
On Friday (September 24), Moody's announced an upgrade for Hungarian sovereign debt to Baa2/Stable from Baa3/Positive. This was not entirely unexpected, on the grounds that:- Moody's previous Baa3 was one notch below the BBB/Stable ratings maintained by S&P and Fitch Ratings; and- the agency held Hungary on a Positive rating outlook for almost exactly a year prior to this latest decision.Yet, the upgrade was still a bit surprising, for some because of the remaining uncertainties around Covid prospects, and for us because of the almost complete lack of certainty regarding Hungary's access to EU funds, as regards the 2021-2027 EU budget and the RRF facility. Moody's simply treated this latter issue in its assessment as a risk of belated access to RRF funds. In our view the risk currently is that Hungary may not get the RRF funds at all, and it may receive only a part of its quota out of the 2021-2027 EU budget.Anyway, in other respects, we find Moody's argument correct. They say Hungary has shown a great deal of resilience to Covid impacts, as proven by a relatively moderate economic setback in 2020 and a quick and forceful rebound so far in 2021. On this basis, they expect the fiscal deficit to normalise and the debt ratio to return to its earlier decreasing trend quite soon. They pointed out the high fixed investment ratio, on the basis of which they see Hungary's potential growth at 3-4% annually over medium term.Further positives Moody's mentioned were EU membership, relatively low environmental risk, good fiscal metrics compared to peer countries and moderate exposure to social risk factors. Negatives, as they saw, were a mediocre domestic education system, with pot...

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