Hungary suffered a jolt after the credit ratings agency Fitch downgraded the country’s debt to a notch above junk. Fitch’s move was triggered by Hungary’s recently approved budget.
Terming the budget as ill-conceived, Fitch said the budget passed on Thursday afternoon lacked direction. Hungary is one of the worst affected countries by the global slowdown and had received stand by loans worth €20 billion (£17 billion; $26 billion) from the International Monetary Fund (IMF) and other lenders.
The lower sovereign rating will make it difficult for Hungary to raise funds in the future.
Fitch has lowered Portugal’s sovereign credit rating by one notch to A+ from AA– on Thursday as well citing “deteriorating near-term economic outlook”.
After Fitch lowered Hungary’s debt rating to BBB– , a notch above junk bonds; the country’s Economy Minister said the decision was not surprising though regrettable.
Hungary has vowed to bring down its budget deficit to below 3% of net borrowing, Fitch remains unconvinced about the country’s economic strategy.
Hungary has initiated certain fiscal and economic reforms to strengthen its tottering economy, such as levying new duties on foreign owned businesses. However, it has also introduced steps like flat income tax rate – which will potentially lower government earnings. To worsen matters, it has refused to cut government spending and initiate austerity measures similar to its European peers.
Fitch argues that lack of reforms on public pensions in the recent budget will actually worsen the economic situation in coming years. It terms the 2013 targeted growth rate of 5% as ‘optimistic’.
“The downgrade of Hungary’s rating reflects a material worsening in the underlying medium-term budget position, while relatively high level of public, external and domestic foreign-currency debt leaves the country vulnerable to negative shocks”, said Ed Parker – head of Emerging Europe at Fitch.
Hungary has already been downgraded to a notch above junk by the other two leading ratings agencies – Standard & poor’s and Moody’s.