Index – Economy – Debt in foreign currency has returned to Hungary

In recent years, the self-financing program has been key to managing the Hungarian government’s debt. In other words, within the financing of Hungarian public debt, which is decreasing in proportion to GDP (from 80.8 percent in 2011 to 66.3 percent in 2019), the emphasis was mainly focused on securities issues of the retail government.

The MÁP Plusz series, which pays almost 5 percent a year, and the variable-rate PMÁK series, which tackles inflation with a substantial interest rate premium, were also popular.

(If you are interested in the details of the Hungarian public debt, you will find all the important data and processes in this presentation in English).

Praise and criticism

Debt financing has also received much praise and criticism. In the positive opinion, the debt structure is much more secure, when the bonds are in the hands of dispersed retail investors instead of large foreign institutional investors, since then the Hungarians have financed ourselves, the small Hungarian investors will not flee to the same time as foreign funds.

At the same time, there was a recurring criticism that Hungarian debt could be financed much cheaper, in a more diversified portfolio, with a higher foreign currency debt ratio, it would be much cheaper to finance debt.

The two truths lived together, the debate was probably refinable to optimal proportions.

The virus brought a change

Then came the coronavirus and, like everywhere else, it meant major changes in debt financing.

The purchase of government securities by the Hungarian population stagnated.

There was no liquidity shock, like massive redemptions, but it seemed that the original plans were no longer sustainable. There could be several reasons for this:

• Physically, people did not make it to the bank, the post office, the treasury, government securities, although there are many online shopping options, many people buy in person, directly, and several banks are explicitly behind in building online sales.

• Rising unemployment and caution from people who fear the economic effects of the virus have also committed less money. The expiring bonds were not necessarily renewed, but they were forced to meet the amounts and consume them.

• In the end, for the time being, perhaps only to a small extent, but also due to the rapid drop in the exchange rate, there may have been an “escape”, that is, currency conversion.

This effect may mean a loss of HUF 900-1000 million in retail government securities purchases year-round, which is a factor that the Government Debt Management Center (GDMA) hopes to address. As indicated in one of its publications, by 2023 the stock of retail securities held by households could increase to HUF 11 billion from the level of HUF 7.766 billion at the end of 2019.

Additional needs

Another important change was that due to the negative economic outlook for the coronavirus and the government’s rescue measures,

and the cash deficit of the central government subsystem quadrupled, from HUF 367 billion to HUF 1.601 billion.

Furthermore, before the virus, in January 2020, when the government was still very optimistic, it also bought back many foreign currency bonds, which were not included in the original plans (and, therefore, the participation of the foreign currency Hungarian debt fell from 17% to approximately 15%).

In announcing the campaign, ÁKK used a fun communication trick, which reported on the interest saved in the following years, not on the exchange rate at which it repurchased the securities at the end of the performance reduction period. However, he was able to pay part of the interest in the future at the high repurchase rate.

On the one hand, the planned volume of issuance of institutional forint bonds increased by HUF 1,652 billion (mainly with government bonds at 3 and 5 years) and increased the issuance of planned bonds in foreign currency from 1 billion euros to 4 billion euros.

It was the first half

Then on April 23, 2020, we issued the first half of this foreign currency bond program, foreign currency bonds maturing in 2026 (6 years) and maturing in 2032 (12 years), worth € 1- 1 billion.

The main organizers of the successful bond issue were the financial institutions Citigroup, ING Bank and JP Morgan Securities. The fixed interest rates on the two bonds were 1,125 percent and 1,625 percent, which in itself doesn’t say much about the price because investors bought the bonds at a discount. It is a better measure to say that the performance premium was 188 basis points compared to the German government bond maturing on August 15, 2026 and 226 basis points compared to the German government bond maturing on February 15, 2026. 2030.

More precisely, after a period of Canaan, it is again high, which is mainly due to the uncertainty of the emerging market caused by the virus.

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Again, these values ​​can be evaluated in many ways. Some questions will surely arise:

• Are these bonuses expensive?

• It wouldn’t have been worth moving earlier, since we could have issued cheaper documents even in happy times of peace, why didn’t we move then?

• Why did you hastily swap a bunch (about $ 1 billion) of foreign currency bonds in January when we had to fix a new issue?

However, at least two aspects should not be left out of the answers. No one could have expected the arrival of the coronavirus and the situation changed. And there is one very important aspect in the big picture: the effect of the exchange rate. In other words, the forint fell so much that if we had issued 1 billion euro foreign currency bonds in January 2020, we could have done so at a lower interest rate of 40-50-60 basis points, but it would have increased during the HUF 336 billion debt (one euro was 336 HUF 336). 350 forints (now the euro is only 350 forints).

ÁKK is not yet ready for this year’s bond issues, there are still many elements in its plans. The issuance of specific “green bonds” could also be considered, in euros, Japanese yen or even Chinese yuan. This is a document whose consideration may be related to some ESG goal in the future, or even in the past, but duly justified. Obviously, this is not a challenge with the gigantic carbon neutralization plans.

Furthermore, sovereign debt experts also know that, no matter how optimistic the government and the MNB are, it is in the deck that there will still be negative changes this year (slower growth, higher deficits, etc.), but if it does, fortunately , there are still many reserves in the system.

In the long run

It is definitely positive that, although presumably it is a bit late, but politics has finally recognized that as long as the foreign currency debt ratio is at a moderate level (between 10 and 20 percent of total debt), it is worth using Sometimes cheaper sources of foreign currency, not from the devil. with.

Also, if there is a really big issue, Hungarian Retail Financing doesn’t protect you either, it’s not as stable, especially since the MÁP Plus, which can be redeemed at any time, behaves much more like a tourist instrument than a 3-5 forint -7 years or a bond in foreign currency. . With the ugly Hungarians, it is already sold, investors only sell and buy on the secondary market, but do not return it to the state).

Therefore, now Hungarian debt financing has returned to a previously abandoned missing link, and most importantly, this is beginning to create an interpretable Hungarian euro yield curve. In other words, you can see the market price of Hungarian debts with different maturities, which is essential in the case of a professionally managed public debt.

Some important caveats

Hungarian debt management is technically professional, which is a problem, however, that in fact the spectacular debt reduction as a proportion of Hungarian GDP is a bit like the village of Patyomkin. Let’s think about some problems!

• Compared to the previous trajectory (200: 80 percent), meanwhile we have substantially reduced public debt as a proportion of GDP by absorbing the assets of private pension funds. Not only was it a one-time amount, unfortunately it was only partially spent on reducing public debt, but it has also increased the state’s playing field each year (through the amount not paid to private funds) and increased the burden of future, the state has to be alone in pensions so there will be no private pillar.
• The level of foreign exchange reserves is also important for the net situation, now the level of international reserves has risen to 29 billion euros with foreign currency bonds in April, but the debt reduction of the last five years has not it can be interpreted without knowing that the level of Hungarian foreign exchange reserves fell by at least 7 billion euros between March 2013 and 2020.. In short, we can think of the situation of a private person who is very happy that he no longer owes his friend 3 million HUF, but it was not that the debtor worked so well that he received a premium of 3 million HUF, from which he paid his debt, but only he himself will finally deliver the 3 million he had in the bank to a creditor.

Finally, it’s worth looking at this compilation from The Economist to see which emerging states were in the most stable debt situation when the coronavirus arrived. Hungary is proud that its debt / GDP ratio is declining, which is good, but according to the four aspects of the table above (debt proportional to GDP, external debt proportional to GDP, financing price, reserves), it does not appear to be in a very good position.

Of the 66 emerging countries, to the surprise of many, Botswana’s indicators were the best, with Taiwan and Singapore even ahead of the African country. But in the Daily Star article, the ranking that is also available for free seems to be

It is difficult to establish how well-founded this list of experts is, and the Hungarian political leadership would certainly explain our position with the negative attitude from abroad towards Hungary. But the caveat may be that Poland, which has often been criticized with us, is far ahead, ranking 13th in this ranking.

(Cover illustration and cover image: deer / index)