SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 20 June 2016ContactsIrina Baron Asst Dir-Research Associate irina.baron@moodys.comXian Li 212-553-1404Senior Research Analyst xian.li@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Sovereign Risk ReportHungary Sovereign Credit Risk Rises in Spite of Fed RestraintHungarys five-year Sovereign EDFTM (Expected Default Frequency)1 metric, which measures the probability its government defaulting on a bond over the next five years, has seen a sharp increase since the beginning of June. The countrys Sovereign EDF measure rose from 0.19% on June 1 to its current 0.23%. Its credit risk has been rising since the National Bank of Hungary cut its benchmark rate on May 24 in an attempt to boost economic growth amid weak inflation. The deposit rate now sits at a record low of 0.90%. However, unlike its first rate cut in March, which helped drive down the countrys credit risk signals, the latest easing measure failed to lower the Sovereign EDF measure. Despite the recent gains, Hungarys current Sovereign EDF measure is the third lowest among its Emerging Market (EM) peers, following Korea and the Czech Republics 0.12% and 0.08%, respectively. Yet even with relatively low credit risk measures, recent Hungarian monetary policy actions highlight the worry over the countrys low annual rate of inflation, which fell to -0.2% in May, putting it significantly below the central banks target of 3%. The downtrend has been driven by lower oil prices and weaker global economic growth.The banks monetary policy actions were offset by the latest figures from the Hungarian Central Statistical Office, which showed that Hungarys economic growth slowed sharply in the first quarter of 2016. GDP growth slowed to 0.9% in Q1 (see Figure 1), substantially lower than its Q4 2015 growth rate of 3.2%. With less than a week le...
