The use of euro would definitely improve Hungary’s sovereign creditworthiness if it were to follow meaningful steps toward adoption. The path leading to the single currency may be long, but the economic discipline would “be very useful for the country’s financial future,” according to a recent note from S&P Global Ratings.

Political Momentum and Economic Criteria

Peter Magyar’s incoming government of the Tisza party won a landslide victory on April 12 and now has a parliamentary supermajority. The mandate is unequivocal, giving the new government of Hungary the authority it needs to implement the changes to the constitution which are required. As such, the administration has agreed to set a “foreseeable and achievable” deadline for the use of the single currency.

At the moment, though, S&P said that Hungary does not satisfy any of the convergence criteria for eurozone membership. The tough economic requirements include a stable exchange rate, low long-term interest rates, sound public finances, and low inflation. Significant and continuing economic shifts will be needed to meet these benchmarks.

Potential Rating Upgrades and Existing Fiscal Risks

Past experience suggests that an increase of up to two notches in ratings of countries that joined the euro zone follows accession, such as the Baltic states and Croatia. S&P said the first upgrade normally corresponds to the crucial fiscal consolidation that takes place before the adoption. In general, the second upgrade occurs after full accession, as a result of the credibility of the European Central Bank’s policy, improved liquid capital market access and the significant decrease in the foreign exchange risks.

Hungary’s fiscal situation is still fragile, however, as the country charts new territory in the future. The nation’s rating is ‘BBB-‘, the lowest investment-grade rating, with a negative outlook, according to S&P. The rating, which is carefully monitored by national financial institutions, such as the Magyar Nemzeti Bank, is a sign of the continuing fiscal weaknesses and the continued economic risks of recent increases in global energy prices.