Fitch Lowers Hungary's Long-Term Issuer Default Ratings

Fitch Ratings has on Friday revised the outlooks on Hungary's Long-term Issuer Default ratings (IDRs) to Negative from Stable. Its ratings are affirmed at foreign currency IDR 'BBB+', Short-term foreign currency IDR 'F2', and Long-term local currency IDR 'A-' (A minus). Its Country Ceiling is affirmed at 'A+'.

"The revision of Outlook reflects Fitch's view that shocks from global financial turbulence and the likelihood of recession in the euro area have heightened downside credit risk given Hungary's high external debt stock, wide current account deficit and large external financing requirement," said David Heslam, Director in Fitch's sovereign team.

“The deterioration in global, and particularly European, financial conditions have heightened the risks for economies with large external financing needs and reliance on bank financing. Hungary's gross external debt amounts to 99% of GDP, one of the highest levels in Central and Eastern Europe,"

Financing of Hungary's current account deficit - which stood at 6.4% of GDP in 2007 (based on revised official statistics) - is “sensitive to strains in international capital and banking markets, with a significant proportion of financing dependent on flows to local banks from their western European parents."

“Heightened risk aversion has led to strains in government debt and inter-bank markets and to a weakening of the HUF, which if exacerbated would increase debt servicing requirements and place strains on loan portfolios of the domestic banking system, where foreign currency-denominated loans account for over half of private sector credit."

In addition, the global economic slowdown, and particularly the likelihood of a recession in the euro area - the destination for over half of Hungary's exports - “has weakened an already subdued growth outlook, increasing the challenges facing the government in its attempts to continue to narrow the fiscal deficit."

“At 66% of GDP the government's gross debt remains high relative to the 'BBB' median of 28% and low economic growth will make it difficult for the debt burden to fall, while external markets are an important source of financing, including through substantial non-resident holdings of HUF-denominated debt."