Hungary: muddling through the EM tide

Something to bear in mind for all that money flowing into emerging-market bonds lately – there are still some hefty pockets of EM credit risk out there.

Remember Hungary?

Barclays Capital wants you to.

Hungary does not appear to have boosted its credit profile following last week’s announcement introducing a new set of taxes, despite a fillip to the forint after G20 attendees said they would avoid “competitive devaluation”.

At least that’s what BarCap thinks after considering increased flows to EM bonds. Although they have noted a steepening in the Hungarian CDS curve, suggesting confidence about the short-term finance risk…

And also note that Hungarian credit has been doing well compared to its peers (click to enlarge):

…here’s what they have to say about the longer-term prospects for Hungarian credit:

The tide of EM flows may continue to provide support for Hungary credit, but we view the valuations of the longer-dated bonds on the Hungarian curve as particularly stretched.

Things have not been looking up for Hungary following the government’s announcement last week of a series of ‘crisis taxes,’ designed to ease the budget deficit. As BarCap noted last week:

The scenario presented by the government suggests an inward looking ‘muddle through’ approach rather than the reform-driven break–through with regard to Hungary’s fiscal sustainability dynamics that many had hoped for after Fidesz won the local elections so convincingly..

Foreign companies investing in the region such as Vodafone and Tesco have already voiced criticisms of the new taxes, which target the telecoms, energy and retail sectors, with the EU Commission later joining the chorus of disapproval last week.

The above suggests it cannot live in the EM bubble forever either. As BarCap notes today (emphasis ours):

We note that S&P still has a negative outlook on its BBB- rating, the lowest investment grade rating. Against this background, we remain cautious on Hungarian credit and do not think that the rally over the past weeks can be sustained.

Which really says it all.

Related links:
Erste warns Hungary on bank tax policy – FT
Hungary agrees to cut budget deficit – FT
Moody’s tires of Hungary, Hungary tires of austerity – FT Alphaville