The deterioration in global, and particularly European, financial conditions have heightened the risks for economies with large external financing needs and reliance on bank financing. Hungary's gross external debt amounts to 99% of GDP, one of the highest levels in central and eastern Europe. Financing of the current account deficit - which stood at 6.4% of GDP in 2007 (based on revised official statistics) - is sensitive to strains in international capital and banking markets, with a significant proportion of financing dependent on flows to local banks from their western European parents. Four domestic banks have announced that they are to restrict growth in foreign currency loans.
Heightened risk aversion has led to strains in government debt and inter-bank markets and to a weakening of the HUF, which if exacerbated would increase debt servicing requirements and place strains on loan portfolios of the domestic banking system, where foreign currency-denominated loans account for over half of private sector credit. In addition, the global economic slowdown, and particularly the likelihood of a recession in the euro area - the destination for over half of Hungary's exports - has weakened an already subdued growth outlook, increasing the challenges facing the government in its attempts to continue to narrow the fiscal deficit. At 66% of GDP the government's gross debt remains high relative to the 'BBB' median of 28% and low economic growth will make it difficult for the debt burden to fall, while external markets are an important source of financing, including through substantial non-resident holdings of HUF-denominated debt.
Fitch notes that the authorities' response to recent events has been strong. The National Bank of Hungary has announced a EUR5bn swap facility with the European Central Bank, while the government has reduced its deficit target to 3.4% of GDP in 2008 and 2.9% in 2009, from original targets of 3.8% and 3.2%, respectively. "Hungary's credit ratings are supported by its robust institutional fundamentals, relatively rich and diverse economy, strong debt management capacity and untarnished modern debt service record." Political and social stability is anchored by membership of the European Union. At USD13,750 (at market exchange rates), income per head is high relative to the 'BBB' median of USD6,900.
