S&P cuts outlook on Hungary to 'negative' on public finance risks

S&P cuts outlook on Hungary to 'negative' on public finance risks

Standard and Poor's Ratings said today it cut its outlook on Hungary's sovereign debt ratings to 'negative' from 'stable', citing worsening prospects for public finance consolidation from next year.

The former communist EU member has taken steps to cut its runaway budget deficit, but analysts fear the government will lack the discipline ahead of election in 2010 to stay on course to meet the EU's cap of 3 pct of GDP.

The forint currency fell more than half a percent on the news.

'The increasing political incentives and pressure to dilute the fiscal reforms ahead of upcoming elections, coupled with the increasing cost of external borrowing, will interrupt Hungary's progress in reducing its deficit from 2009 and will keep the debt burden rising,' Standard & Poor's credit analyst Frank Gill said in a statement.

The government lost a referendum on some of its fiscal reform steps last Sunday by a larger than expected margin, forcing it to overturn the measures and upping pressure for it to abandon the unpopular policy path.

Its forint currency and debt markets have also been hit by falling global risk appetite and analysts widely expect the central bank will have to raise interest rates, further weakening growth of its ailing economy.

'The strong increase in the government's borrowing costs and a weaker than expected economy have already begun to eat into the fiscal buffer arising from Hungary's budgetary overperformance in 2007,' added Gill.

'Due to past consolidation measures, the budget deficit should fall further in 2008, to 4.5 pct of GDP, short of the government's target. Furthermore, we forecast that budgetary deficits will remain unchanged in 2009 and 2010.'

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