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Ok, we have long seen such a large currency issue from Hungary
The debt manager announced Thursday that it has again revised its 2020 financing plan and expects to issue an additional 2 billion foreign currency this year on top of the 4.5 billion euros planned so far. In the afternoon, the issue was completed: Hungary sold 10- and 30-year bonds for a total value of 2.5 billion euros.
With this, our already high net foreign currency issuance this year could be even higher. According to our quick calculations, gross issuance could approach HUF 2.5 billion, while this year’s foreign exchange maturity was originally around HUF 800 billion. In other words, the net issuance of foreign currency can reach HUF 1.6 billion (difficult to say more precisely because it depends on buybacks, which increase redemptions).
The graph shows that we have to go way back to borrowing in foreign currency, there was an example of this when the IMF loan was arranged after the 2008 crisis, but then we were not in debt to the market.
With this year’s edition, the state’s two previous strong goals are also temporarily violated:
- On the one hand, the share of currencies in total debt will increase from 17.7% at the end of last year. However, according to ÁKK’s announcement, the benchmark of 10-20% will not be damaged, that is, the ratio can remain below 20%, even by a hair.
- On the other hand, the debt / GDP ratio will also increase, which has been falling steadily in recent years, although only partly due to the issuance of foreign currency, since our indebtedness in florins will also skyrocket this year due to the higher deficit budgetary. The amount of nominal GDP and debt at the end of the year remains uncertain, but in its latest presentation to investors, ÁKK expects a debt ratio close to 80% by the end of the year, after 66.3 at the end of last year.
In other words, Hungary had to give up two important goals this year due to the crisis.
But why did they need foreign exchange now?
For the first time, Thursday’s issuance was surprising because we are beyond this year’s foreign exchange spending and the amount of foreign exchange reserves also seems sufficient. That is why the ÁKK has highlighted that the new financing will already be used for the pre-financing of the maturities of 2021. According to the table on the debt manager’s website, the repayments for the following years will be the following:
It is clear that the current issue of 2,500 million euros will cover practically all the maturities of the next year, so
Hungary will not need to raise funds in foreign currency at all.
Furthermore, even in 2022, there will be no significant financing needs, on the order of one billion euros. The first major maturity may come in 2023, until most currency needs are secured. This chart does not yet include Thursday’s release, which will appear on maturities of 2030 and 2050.
Of course, this does not prevent ÁKK from issuing foreign currency bonds in the next two years, as the foreign currency debt has been actively managed so far, there have been several examples of buybacks of high interest long dollar bonds and the issuance of new cheaper values.
In the currency bond market, the most important thing is always the current mood, if there is a good opportunity to issue, it may be worth taking advantage of it. And that may explain the unexpected transaction on Thursday:
- After the US presidential election, market sentiment was positive and risk taking increased, which is good news for Hungarian assets.
- The second wave of the coronavirus epidemic has mostly been flooded with markets, the chances of a really big negative surprise have diminished, and slowly everyone is waiting for a vaccine as soon as possible.
- Market sentiment in 2021 is unpredictable due to the potential protracted US constitutional crisis.
- From the Hungarian point of view, there are also some issues that may be of interest to investors, but they have not yet been included in the price. Such could be a possible Hungarian veto on the EU budget.
In other words, it seems that now ÁKK had a good opportunity to enter the market and secure foreign exchange financing for the next few years.
Of course, the state’s currency-based revenues and expenditures don’t just depend on debt and deficit financing steps. Therefore, there may be a need for payment (such as the purchase of medical equipment or the vaccine) for which the state would be reluctant to go to the foreign exchange market to exchange forints. Or it could even come with the support of the EU, which could increase the stock of foreign exchange. However, with regard to the latter, the rule of law procedure is currently creating uncertainty, which could even lead to the depletion of EU money.
Thursday’s transaction also means that while the debt ratio may rise to close to 20% by the end of the year, it may start to decline again as we will not have to fundraise next year. The same may be true for debt / GDP ratios, where the picture is a bit different, as much will depend on fiscal discipline in the coming years, on how quickly the government wants or will be able to reduce the deficit below 3%.
Cover image: Shutterstock
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