Fitch: Risk to Hungary's debt target plan on the rise

Fitch Ratings said that while it expects the Republic of Hungary to largely succeed in meeting its fiscal deficit targets over the next two years, downside risks to this scenario have increased and Hungary's high external debt stock, dependence on foreign investors to finance its twin deficits and large gross financing needs leave it vulnerable to a shift in investor sentiment.

"A substantial and sustained reduction of Hungary's large budget deficit is required to rebalance the economy, stem the rise in the government debt ratio, reduce the wide current account deficit and lessen external financing vulnerabilities," David Heslam, associate director in Fitch's emerging Europe sovereign team, said in an agency rating.

Weak expenditure control has resulted in large budget deficits that have culminated in a sharp rise in the general government debt ratio to a forecast 68.5% in 2006 from 53.1% of GDP in 2001, Fitch said. This compares to a median debt ratio of 33.5% of GDP for the 13 sovereigns rated in the BBB range and an average of 38% of GDP for the May 2004 European Union entrants.

Stringent revenue raising measures have largely already been implemented and the government has announced a range of encouraging expenditure restraining measures. In line with the fiscal outlook, Fitch forecast a narrowing of Hungary's current account deficit from 2007, which should be sufficient to stabilize its external debt ratios. However, the agency also stressed that downside risks to this scenario have increased over the past six months and that the government has a large credibility gap to overcome.

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