Hungary special report 2015: Turning a corner

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Data from Euromoney’s survey of country risk suggests economists are increasingly optimistic about the Hungarian economy.

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FOUR YEARS AGO, Hungary was one of the worst performers in the Euromoney Country Risk (ECR) survey, gripped by recession as it began painful structural reforms while tackling high public and private sector debt. Fast-forward to 2015 and economists are bullish about the country’s economic prospects at a time when other sovereigns in Central and Eastern Europe are struggling.

A combination of factors, including the conflict in Ukraine, the sagging eurozone economy and FX depreciation in the face of a strengthening dollar, have resulted in deteriorating country risk scores across CEE, with major markets including Turkey, Russia and Poland receiving deteriorating risk scores over the second half of 2014. Yet analysts participating in Euromoney’s quarterly survey of country risk have upgraded Hungary as improved economic data suggest the country has turned a corner after its painful experiences post-2008. 

Coming out of recession

Hungary suffered a steep recession in the wake of the global financial crisis and entered a period of sharp deleveraging in both the public and private sector. With economic growth averaging -0.4% between 2007 and 2013, Hungary was one of the worst performers in Europe in the ECR survey during this period, as the ability of the sovereign to repay its bulging external debt load was repeatedly called into question. 

ecr hungary 2015
Yet that threat appears to have been banished, as more positive economic data have brought Hungary an improved assessment from economists participating in the survey. With growth expected by Moody’s to reach 3% in 2014 and 2.5% this year, the economy has responded to government policy actions with rising consumption and investment. Hungary now appears less susceptible to external shocks thanks to a persistent current account surplus, low inflation and a sharp fiscal consolidation, which puts the government on track to achieve its target budget deficit of 2.8% of GDP in 2015. Although the government debt ratio remains high, at approximately 77% of GDP, large foreign exchange reserves now provide an important backstop to the forint and the domestic financial sector, a development that bodes well as Hungary attempts to shake off the economic challenges of the past three years.


Euromoney’s country risk rankings are a valuable guide to how economists view the sovereign risk profile of countries over time. The survey uses a simple methodology to measure political and economic risk, as well as the structural factors that affect a country’s risk profile, applying the same criteria to both advanced and emerging economies. As the survey is compiled on a real-time basis, the ratings often illustrate trends in risk perception earlier than other leading indicators, such as traditional credit ratings.

Ranked 66th safest country globally in the fourth tier of the ECR rankings, Hungary’s risk rating performance in the survey has been driven by three factors. Firstly, analysts’ scores in the survey’s economic outlook indicator have improved sharply in the past 12 months as signs of confidence have returned to the domestic economy. Secondly, Hungary’s score for government finances has also improved in step with the consolidation of public finances achieved by the present administration. Finally, participating economists are much more upbeat about outlook for employment in Hungary and have raised their scores in this crucial aspect of the survey as unemployment has fallen, which bodes well for continued economic recovery.  

Work to be done

So what risks remain in 2015? The threat posed by Hungarian households’ large exposure to mortgage debt denominated in Swiss francs and euros is finally receding. Following legislation enacted by the government of Prime Minister Victor Orban, $11 billion of outstanding FX-denominated loans are to be converted into forints, providing a boost to borrowers and the economy. Yet external debt levels in the public and private sector remain elevated in regional terms, meaning that much work remains to be done if Hungary is to insulate itself from external shocks such as a resumption of the eurozone crisis. The risk of deflation is shared by Hungary and many other European countries. Falling prices must be avoided if the reduction in nominal debt levels is to continue, making a reduction in interest rates likely in the near term. 

If Hungary avoids deflation while continuing to meet its fiscal commitments, and leads the way in enacting the structural reforms so badly needed elsewhere in Europe, a further improvement in its risk score seems likely over the next 12 months.