Hungary corporate outlook: inflation, lack of EU funds, tight and costly funding test credit quality
The count of negative credit outlooks among the 79 corporate issuers rated by Scope Ratings has increased.
“We see six pressing issues for Hungarian firms, even though their intensity varies from sector to sector,” says Barnar Gáspár, Director, Corporate Ratings, at Scope.
“Hungarian firms are confronting demand shocks, labour shortages and rising wages, missing EU funds, volatile prices in an inflationary environment and high interest rates militating against new investments,” Gáspár says.
Scope rates 79 corporate issuers in Hungary mostly in the BB and B categories. In the tough operating environment in January through October 2023, 10 issuers were upgraded compared with 5 downgrades, though two issuers are under review for possible downgrade.
Credit rating outlook distribution of issuer ratings in Hungary
Source: Scope Ratings
“We have recently assigned six negative outlooks, half of which related to the construction sector and home builders, driven by the lower demand for investments from the government partially due to the blocking of EU funds in the dispute over the rule of law. The remainder were related to shrinking consumer demand as inflation has eroded households’ purchasing power,” says Gáspár.
“We note that four Hungarian bonds issued by companies we rate are in grace period at 31 October 2023 as their rating fell below B+. This may trigger debt acceleration that can have default implications.”
State intervention has bolstered liquidity for SMEs
Hungarian companies have retained access to debt capital markets despite very high interest rates due to state-subsidised lending programmes such as EUR 4.2bn financing at yearly fixed interest rates of 5-6%, denominated in forint and euro, through the Baross Gábor Reindustrialisation Programme. The programme was intended mainly to cover increased working capital needs and capital expenditure. This helped Hungary avoid a corporate liquidity crunch and improved liquidity for many firms.
Central bank has diminished room for manoeuvre
However, there are no significant subsidised lending programmes available for large corporates because the central bank needs to maintain tight financial conditions to combat inflation and with its reported losses its room to manoeuvre became limited. Small and medium-sized enterprises (SMEs) that can still access the Széchenyi Kártya programme consisting of subsidised interest rate financing facilities, albeit in small amounts.
Foreign investment in auto sector helps bigger construction firms
Hungary has long enjoyed strong linkages to German car manufacturers such as Audi AG* and Mercedes-Benz AG which have had plants in Hungary for many years. In addition, BMW AG is setting up new production facilities in the city of Debrecen while Chinese investments of up to EUR 11bn are planned for electric-vehicle and battery production. Chinese car and bus manufacturers are likely to follow. Hungarian firms Market Építő Zrt. and KÉSZ Holding Zrt. are carrying out part of the construction work.