Hungary must temporarily abandon its ten-year war, but is already collecting ammunition to continue.

Ten years ago, one of their most important struggles was announced by the Orbán government

When the Orbán government took office in 2010, it immediately made reducing debt and improving the debt structure as one of its number one tasks. At the end of 2009, our debt was 78.2 percent of GDP, after which it increased further in 2010 and 2011, peaking at 80.8 percent.

Since then, however, there has been a direct path downward, with the debt ratio declining to 64.7% at the end of 2019. This even included the fact that during the process the Hungarian state lost the dispute with Eurostat over Eximbank’s legal status, so the bank’s debt had to be included in the state debt.

That is, at the beginning of 2020, we arrived after a long time. a realistic 60% target set in the Maastricht criteria. Not that at any point in recent years has the government seriously flirted with the idea of ​​introducing the euro, but it has been an important benchmark for years.

Then the crisis hit

The additional debt relief was immediately torpedoed by the coronavirus epidemic that broke out in March. It became clear very early in the spring that a further decline would be unlikely this year as the crisis “struck” from two sides at the same time:

• On the one hand, due to the fall in GDP, the denominator of the debt / GDP ratio has become lower, raising the rate with the nominal debt already unchanged.
• On the other hand, the epidemic required a series of government measures that put pressure on the budget. According to current expectations, the deficit may be around 9% of GDP by the end of the year, which means an item of around 3.6 billion HUF, that is, the amount of debt will increase by at least that amount, which will increase the quotient counter.

The total result of up to ten years can turn into nothing

In addition to the above, we already project that public debt could rise to 77-78 percent of GDP during the year, but the final ratio could be even higher, now it seems that

It will stop at around 80 percent.

The reason for this is that the state is significantly overbooked and pre-funded this year, according to GDMA’s 2021 funding plan, around HUF 730 billion will be used to finance next year’s deficit, and another HUF 690 billion will be used. to repay maturing foreign currency bonds. In other words, already in 2020 approximately HUF 1.4 billion will be included in debt, but it will facilitate the year 2021.

This means that the debt ratio will rise a little more than necessary this year, but may fall again next year, even with the forecast budget deficit of 6.5%.

Therefore, of the deficit of around HUF 3,300 million forecast for 2021, it will be necessary to finance “only” 2,600,000 million euros and the economy can grow again. But what is the point of shouldering the burden for 2020?

• On the one hand, the impact of the crisis can be “carried” in its entirety this year, as the debt ratio jumps temporarily and then falls again. Otherwise, it would have been more or less the case that this year’s 77-78% rate had stalled in 2021, or even increased slightly based on growth. From an optical point of view, it might seem more beautiful to be able to lower the rate again after a year of jump.
• More importantly, despite the crisis, financing conditions remained especially favorable in 2020, that is, government securities were able to be issued in HUF and in foreign currency at low interest rates. And next year is uncertain in this regard, as big central banks are expected to maintain record low interest rates to support the economy, but inflation may pick up slowly in parallel with the recovery, which could lead to higher yields.
• Third, there was a lot of demand for Hungarian government securities this year, which was also supported by the MNB’s asset purchase program, so there was a good opportunity to book.

TOP10 story
As every year, the writing of the Portfolio compiled the most relevant facts and news of the year. This article is also one of 10.

This provision is well indicated by the fact that the balance of the government’s single treasury account with the MNB jumped to an all-time high, with liquid reserves amounting to nearly 3.4 billion HUF at the end of November. From this, the government will be able to cover a large part of the 1.4 billion HUF needed for next year’s deficit and repayment of foreign currency maturities.

Therefore, according to our current calculations, with the 3.5% GDP growth expected by the government and the financing need of around HUF 2.6 billion, the debt ratio could fall from around 80% this year to around 76% by the end of 2021. With stronger growth or a smaller deficit, this, of course, can be even lower.

And starting in 2022, if we can further reduce the deficit of 6.5% and return to a disciplined fiscal policy with a deficit below 3%, the debt ratio could return to a path of constant decline and the economy will continue growing.