portfolio | Possible budget and credit rating implications of Hungary's government agony

In mid-March [right after the refenrendum -DoDo], S&P revised its outlook on Hungary to `Negative' from `Stable' over the "weakening perspective for sustained consolidation of public finances", after the government suffered a heavy defeat in an opposition-initiated referendum that had charges on doctor's visits and hospital stays and the tuition fee in higher education scrapped (effective 1 April).

At the same time S&P affirmed the country's 'BBB+' long-term and 'A-2' short-term sovereign credit ratings.

The downratings are more connected to expectations on further 'reforms' than real data. The data:

The Central Statistics Office (KSH) announced on Tuesday that the 2007 public sector deficit totalled 5.5% of GDP, considerably smaller than the original plan for a 6.8% gap. The falling out of one-off items means the government could easily achieve its 4.0% of GDP target this year.

...Hungary's economy expanded by a mere 1.3% yr/yr in 2007, and the cabinet expects growth to pick up to 2.4% this year, down from an original forecast of 2.8%.

The expectations:

David Heslam, ratings director at Fitch Ratings in London, told MTI Econews that should the Prime Minister resign, that would be a clear sign that support for his fiscal consolidation programme "had waned sufficiently" within the party and that means the possibility of a fiscal loosening ahead of the elections "becomes material". That would have a negative pressure on Hungary's ratings, Heslam said.