S&P: Hungary’s Progress Toward Euro Adoption Could Boost Credit Rating
Hungary’s Euro Adoption and Its Impact on Sovereign Credit Quality
BUDAPEST, May 8 (Reuters) - Meaningful steps taken towards meeting the criteria for joining the euro zone are likely to improve Hungary's sovereign credit quality, although the path to euro adoption could be lengthy, ratings agency S&P said.
Political Commitment to Euro Adoption
Hungary's incoming Prime Minister Peter Magyar, who won with a landslide on April 12, has pledged to adopt the euro with a "foreseeable and achievable" target date, with his Tisza party's supermajority likely allowing it to push through the required constitutional changes.
S&P’s Assessment of Hungary’s Current Status
S&P said in a note on Thursday that Hungary currently does not meet any of the requirements for joining the euro zone, which include maintaining low inflation, sound public finances, a stable exchange rate and low long-term interest rates.
Benefits of Meeting Convergence Criteria
"Meeting the convergence criteria could prove beneficial for Hungary’s creditworthiness," they said, noting that euro zone accession has typically led to sovereign rating upgrades of up to two notches for the Baltic countries and Croatia.
Fiscal Improvements Before Euro Adoption
"One notch has generally reflected improvements in fiscal positions ahead of the euro adoption, as candidate countries made progress towards consolidating their public finances," they said.
Post-Adoption Advantages
The second, after joining the euro zone, reflected the European Central Bank’s policy credibility and effectiveness, better access to the bloc's deep and liquid capital markets, and the reduction in foreign exchange risks.
Current Rating and Outlook
S&P rates Hungary 'BBB-', its lowest investment-grade rating, with a negative outlook.
Risks and Challenges Highlighted by S&P
The agency told Reuters earlier this week that downgrade warnings for Hungary and Romania reflect the fiscal risk facing the two emerging European countries, having already in March pointed to the risk to Hungary's rating should the recent surge in energy prices persist.
(Reporting by Anita Komuves and Gergely Szakacs; Editing by Kirsten Donovan)
