Fitch raised the outlook on Hungary’s sovereign credit rating to ‘stable’ from ‘negative’ on June 6, making the ratings agency appear out of touch with events on the ground. The long-term rating on Hungary’s foreign currency debt currently sits at ‘BBB-‘, one notch above ‘junk’ status, and the outlook improvement makes a rating downgrade in the near-term less likely.
Fitch positively revised the outlook due to ‘increased confidence’ that Hungary will cut the budget deficit below 3% of GDP by 2012. Where is this confidence coming from? They point to fiscal measures detailed in the latest convergence programme (submitted annually to the European Commission) and to structural reforms announced by the government in February 2011 (see chart below) to justify the revision. However, the ‘increased confidence’ is baffling since these reforms are so far mostly words that are not yet backed by action.
Parliament has not yet passed the vast majority of these promised reforms. In fact, the government has not yet submitted most of the draft legislation, making an outlook upgrade appear premature. The situation would be similar to me pledging to run a marathon and winning a participation medal just for registering.
According to the government’s timetable, most of the legislation – including that laying out a National Employment Programme, a new disability pension system and a new Public Procurement Act – are slated for July. At that point, we can better discern whether the government is really committed to fiscal reform. Up until now, the government has resorted to temporary stopgap measures to contain the budget deficit, such as the de facto nationalization of the private pension system and the imposition of ‘crisis’ taxes on certain sectors, which will do nothing to help the country’s long-term fiscal sustainability and will likely hurt it.
Shockingly, investors continue to give Hungary the benefit of the doubt.