Standard & Poor’s Ratings Services awards Republic of Hungary a rating of (BB+/Negative/B) based on its Banking Industry Country Risk Assessment (BICRA) approach. Hungary is ranked within the BICRA group ‘7’ in the same category as Iceland, Ireland, Lithuania, Portugal, Russia, and Bulgaria. Hungary’s economic weaknesses entail: net FDI outflow, poor GDP Growth prospects, weak public finances, high external debt, increasingly corruption, banking sector under pressure, and unpredictable and unorthodox policies (Standard & Poor’s, 2012).
The projected stability of any country whether politically and economically influences future cash flows and can negatively impact on the profitability of any organization. According to Standards & Poor’s rating agency, the economic risk score of ‘7’ is indicative of the fact that Hungary confronts “high risk” in “economic resilience” and “economic imbalances” and a “significant high risk” within “credit risk within the economy.” Hungary has made stable progress in lessening its budget deficit and has shrunk government balance within 2011 to an excess of 4.3% of GDP.
Translation exposure details the risk to which Hungary is exposed during translating foreign subsidiaries’ balance sheets and income statements. The policy for mitigating Hungary from translation exposure for foreign net assets centers on hedging the countries debt/equity ratio, to ensure that it is unaffected by exchange rate movements (Wagner, 2012). Hedging represents financing of a certain portion of capital employed within foreign currencies with loans and derivatives in matching currencies.
Transaction risk exposure represents the risk that exchange rate movement within the export revenues, and import expenses that are likely to impact on companies’ operating profit and the cost of non-current assets. Alternative means of hedging transaction employing diverse financial contracts and operating techniques. Financial contracts entail aspects such as money market hedge, option market hedge, swap market hedge, and forward market hedge (Srivastava, 2008). Operation technique encompasses aspects such as lead/lag strategy, choice of the invoice currency, and exposure netting.
Political risk represents political change that shifts the expected outcome and value of a certain economic action by altering the probability of attaining business objectives. Hungary manifests low political risk exposure with regard to the incidence of currency restrictions, business interruption, forced abandonment, political violence, and expropriation (Clark & Tunaru, 2001). Firms can deal with political risk through considering insurance as an option, circumventing political risks with control procedures, dealing with political risks on an ongoing basis, comprehending macro and micro political risk environment, and diversifying political risks by undertaking proactive steps to appraise and mitigate the risks.
Hungary has paid close attention to lowering environmental risk in a bid to guarantee that all operators have access to adequate physical, human, physical, and financial resources to reduce and rectify social economic inequalities and the impact to the environment. Environmental and health risks possess a bearing of social inequalities. Hungary has a comparatively stable social and gender inequalities, as well as with regard to health and environment based on environmental health challenges such as housing and residential amenities, air quality, work-related health attributes, climate change, and waste management (Kosmidou et. al., 2008).
In conclusion, some of the principal factors that Hungary enjoys and which cushions the country from risks include modest private sector debt as per the international standards; steady market shares of main banks and spotlight on nonvolatile commercial banking operations; and, comparatively progressed, diversified, and open economy with a skilled labor force. Despite the outlined strengths, Hungary faces major weaknesses, namely: absence of predictability of the policy framework that is likely to drag on Hungary’s economic growth within the next few years; banking sector that will possibly be marginally profitable in 2012-2013 subsequent to posting losses within 2011; extremely high credit risk within the economy with an enhanced share of foreign currency retail loans; and, high dependence on external borrowings based on the fact that the share of key customer deposits within the funding mix remain limited.