Hungary not getting EU recovery funds would hit credibility – Fitch

Hungary not getting EU recovery funds would hit credibility – Fitch

By Gergely Szakacs

BUDAPEST (Reuters) – Any failure by Hungary to pass reforms to unlock European Union recovery funds would harm policy credibility, Fitch Ratings told Reuters, adding that possible renewed market pressures from losing access to EU funds could be a trigger for rating action.

The EU set up its 724 billion-euro Recovery and Resilience Facility in 2021, split between grants and loans to spend until 2026, to help economies rebound from the COVID-19 pandemic economic slump and drive a shift in the energy sector.

Hungary and Poland have been unable to access the funds due to rows with the European Commission over democratic standards, with no clear timetable on when the money could be released.

The EU is also holding back 22 billion euros worth of regular cohesion funds for Hungary until its government meets conditions related to judiciary independence, academic freedom, LGBTQI rights and the asylum system.

Fitch affirmed Hungary’s credit rating at “BBB” with a negative outlook on Friday, saying any disbursement from the RRF was unlikely before the end of the third quarter.

“While we still do not think, especially with the RRF that losing access to the RRF could have some substantial macro implications, we think for the cohesion funds that would be much more challenging,” Fitch Ratings’ Associate Director Malgorzata Krzywicka said late on Monday.

“For the RRF, the more important aspect which we are looking at is the reputational issue. Not having access to this fund, not being able to agree on certain reforms with the Commission, that would be definitely undermining the credibility of the policy of the government.”

NEGATIVE FALLOUT

She said it was not Hungary losing access to EU funds in itself, but possible negative market fallout, such as big falls in the forint and a surge in bond yields seen late last year, which could be triggers for rating action.

“We are not overly concerned about the RRF as further delays are in our baseline. The cohesion funds, all these procedures are so combined with one another that addressing one part in essence addresses the issues around the other parts,” she said.

Fitch’s next regular review is scheduled for mid-December.

Hungary’s central bank, which launched emergency rate hikes last October to shore up the forint, started paring back those moves as the Hungarian currency firmed some 8% this year and inflation started easing from the highest levels in the EU.

Last week, the bank, which has faced pressure from Prime Minister Viktor Orban’s government to reduce borrowing costs, cut its key one-day deposit rate by another 100 basis points to 16% to ease the burden on the stagnating economy.

However, the prospect of real wage growth returning into positive territory in the second half of 2023 as price growth falls into single-digits will require continued vigilance from the bank, which has flagged further “gradual” rate cuts.

“In the second half of the year we would see some positive real wage growth, which we think could be one of the issues for inflation, especially in terms of the medium term and for it to then return to the target,” Krzywicka said.

“We could see inflation at 8-10% by the end of the year and then these labour market pressures could become a source of inflation not going back to the target next year,” she said, adding that Fitch expected inflation to return to target in 2025.

Fitch sees no cuts in the central bank’s 13% base rate this year, a forecast at odds with the economist consensus in this month’s Reuters survey, which projects 150 basis points of cuts by the end of 2023. The central bank has said changing the base rate was not on the agenda for now.

(Reporting by Gergely Szakacs,; Editing by Ed Osmond)