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���������ֳ�-Paris/London-09 March 2018: ���������ֳ� has affirmed Hungary's Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at 'BBB-' with a Positive Outlook.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
Hungary's ratings balance strong structural indicators compared with 'BBB' medians against relatively higher public and net external debt, a higher level of policy unpredictability and macroeconomic volatility. An improving trend for these latter factors is reflected in the Positive Outlook.

Real GDP growth picked up significantly in 2017 to 4.2%, reflecting a combination of favourable external environment, high EU-funded capital spending, strong wage growth and policy stimulus ahead of general elections. Growth is likely to remain around 4% in 2018, reflecting a continued strong cyclical upturn. Hungary has a track record of higher economic volatility than the 'BBB' median and unorthodox policy decisions, and growth potential is constrained by unfavourable demographics, labour shortages and the expected fall in EU transfers after 2020.

Inflation jumped to 2.4% on average in 2017 (2016:0.4%) but remains below the central bank's target of 3%. The authorities expect to maintain accommodative monetary policy while eurozone monetary policy remains loose. Some imbalances may be emerging as the output gap turns positive: unit labour costs are rising, driven by strong increases in real wages (+10.3% in 2017) and housing prices again increased by nearly 10% during the year. However, ���������ֳ� expects the economy will slow down after 2018, as monetary and fiscal policy may tighten and as EU fund disbursements slow.

Public finances have improved in recent years. The budget deficit, at an estimated 2% of GDP in 2017 (on an ESA 2010 basis) remained below the 3% of GDP EU criterion, and ���������ֳ� expects the authorities to continue complying with this rule over the forecast horizon, despite the recent announcement of potential further tax cuts. Public debt, at 71.7% of GDP at end-2017, continued to decline but remains well above the 'BBB' median of 40.7%. Its ownership and currency structure have significantly improved in recent years and compare favourably with peers, while interest payments are broadly in line with the 'BBB' median.

Sustained current account surpluses since 2010 have materially reduced net external debt, a traditional weakness of Hungary's sovereign creditworthiness. Net external debt fell in 2017 to an estimated 8.5% of GDP (BBB median: -0.8%) based on ���������ֳ�'s methodology, and ���������ֳ� expects continued, albeit lower, current account surpluses, to keep net external debt on a downward trend over the forecast horizon. External liquidity also remains lower than peers, with FX reserves stable at around 2.6 months of current account payments at end-2017 and the liquidity ratio below peers, but the flexibility of the exchange rate partly mitigates the associated risk.

The banking sector has strengthened over the past two years. Legacy NPLs have been cleaned up to a large extent, profit generation capacity has substantially improved while liquidity and capitalisation metrics are solid; the favourable macroeconomic environment is supportive of asset quality. In ���������ֳ�'s view, the risk of damaging policy interventions has reduced, supporting stability in the sector. The large share of foreign-owned assets and low share of publicly-owned banks reduce the risk of contingent liabilities materialising on the state's balance sheet.

Development and doing business indicators are broadly better than 'BBB' medians, reflecting greater economic development and integration with Western Europe. Governance indicators also still exceed those of peers, although the gap with the 'BBB' median is gradually narrowing. ���������ֳ� estimates that politics and economic policy are likely to remain stable after the April 2018 general elections.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
���������ֳ�'s proprietary SRM assigns Hungary a score equivalent to a rating of 'BBB+' on the Long-Term Foreign-Currency (LT FC) IDR scale.

���������ֳ�'s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

- Macro: -1 notch, to reflect weaker policy credibility resulting from a track record of unorthodox and unpredictable policy moves, and low growth potential relative to the peer group.

- External finances: -1 notch, to reflect the higher net external debt stock than peers. ���������ֳ�'s own external liquidity measure, defined as the ratio of liquid external assets on short-term external liabilities, has been improving in recent years but is still low versus the peer group.

���������ֳ�'s SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ���������ֳ�'s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to an upgrade, are:
- Continued reduction in external indebtedness and improved external liquidity supported by current account surpluses
- Increased confidence in the economic policy framework and improved business environment that would support stronger GDP growth potential without the emergence of domestic imbalances
- Sustained decline in government debt/GDP

The main factors that could, individually or collectively, lead to a stabilisation of the Outlook, are:
- A rise in net external debt
- Renewed rise in government debt/GDP
- Deterioration in the economic policy framework potentially leading to adverse developments in external or government finances.

KEY ASSUMPTIONS
���������ֳ� assumes that under severe financial stress, support from Hungarian subsidiary banks would come first and foremost from their foreign parent banks.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Positive
Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook Positive
Short-Term Foreign-Currency IDR affirmed at 'F3'
Short-Term Local-Currency IDR affirmed at 'F3'
Country Ceiling affirmed at 'A-'
Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'BBB-'
Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'BBB-'
Issue ratings on short-term senior unsecured local-currency bonds affirmed at 'F3

Contact:
Primary Analyst
Amelie Roux
Director
+33 144 299 282
���������ֳ� France S.A.S
60 rue de Monceau
75008 Paris

Secondary Analyst
Kit Ling Yeung
Associate Director
+44 20 3530 1527

Committee Chairperson
Charles Seville
Senior Director
+1 212 908 0277


Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com

Additional information is available on

Applicable Criteria
Country Ceilings Criteria (pub. 21 Jul 2017)
Sovereign Rating Criteria (pub. 21 Jul 2017)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy