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Hungary Sovereign Credit Risk Summary

Core Content

This report from Moody's Analytics provides an analysis of the sovereign credit risk for Hungary and other emerging market (EM) countries as of June 17, 2016. It outlines the trends in the five-year Sovereign EDF™ (Expected Default Frequency) metric, which is used to assess the probability of a government defaulting on its bonds over a five-year period. The report also highlights the impact of monetary policy decisions and external factors like the UK's EU referendum on credit risk indicators.

Main Points

• Hungary's Sovereign EDF Increase: Hungary's five-year Sovereign EDF rose from 0.19% on June 1 to 0.23% by June 17, marking a sharp increase in credit risk. This was in contrast to the previous rate cut in March, which had a positive effect on reducing credit risk signals.
• Monetary Policy Impact: The National Bank of Hungary cut its benchmark rate to 0.90% in May to stimulate economic growth, but this did not lead to a decrease in the Sovereign EDF.
• Inflation Concerns: Hungary's annual inflation rate fell to -0.2% in May, well below the central bank's target of 3%, raising concerns about the country's economic stability.
• GDP Slowdown: Economic growth slowed to 0.9% in Q1 2016, significantly lower than the 3.2% growth in Q4 2015.
• Brexit Impact: The uncertainty surrounding the UK's EU referendum on June 23 added to the rise in Hungary's credit risk.
• EM Credit Risk Trends: Fourteen out of nineteen EM countries saw an increase in their credit risk measures during the week leading up to the Fed meeting on June 15. The Fed's decision not to raise rates slightly lowered EM Sovereign EDF measures, but not enough to counteract the rising risks.
• Country-Specific Observations:
  • Turkey, South Africa, Thailand, Indonesia, Chile, and Peru showed the largest increases in default risk.
  • MSCI Emerging Markets Index dropped by 1.7% over the past week.
  • US financial markets also experienced a decline, with the S&P 500 down 1.1% and the two-year Treasury yield falling from 0.72% to 0.69%.

Key Information

• Hungary's Position: Despite the increase, Hungary's current Sovereign EDF remains the third lowest among EM peers, following Korea and the Czech Republic.
• Moody's Analytics: It is part of Moody's Corporation and operates independently from the ratings business, focusing on market signals and investment opportunities.
• Sovereign EDF and Other Metrics:
  • Hungary's five-year Sovereign EDF increased by 6 bps.
  • The CDS Implied-Rating remained at Ba1.
  • The Bond Implied-Rating remained at Baa2.
  • The Senior Rating remained at Ba1.

Summary of EM Trends

• Overall Rise in Credit Risk: 14 out of 19 EM countries experienced a rise in their Sovereign EDF measures.
• Fed Policy Impact: The Fed's decision not to raise rates slightly reduced EM Sovereign EDF measures, but the effect was minimal.
• Market Performance:
  • MSCI Emerging Markets Index fell by 1.7%.
  • S&P 500 equity index declined by 1.1%.
  • US two-year Treasury yield dropped from 0.72% to 0.69%.

Conclusion

Hungary's sovereign credit risk has increased, influenced by weak inflation, a slowdown in economic growth, and external uncertainties like Brexit. While the country's Sovereign EDF remains relatively low compared to other EM peers, the recent monetary policy actions and economic conditions have raised concerns about its long-term stability. The report underscores the importance of monitoring these risk indicators as they reflect the broader economic environment and market sentiment.