The Hungarian National Bank has announced a new program to reduce the high gross overseas debt and the demand for international refinancing. As a core element of the plan, the short-term loans that the commercial banks used to park by the National Bank for two weeks will be transformed into deposits. The Centre of Foreign Debt Management later announced an amendment to its financial plan as well.
Hungary’s foreign debt rocketed under the social-liberal governments: Thanks to their growth program, the debt rate grew from less than 60% of Gross Domestic Product (GDP) to almost 100% at the beginning of the new millennium, still before the breakout of the worldwide economic crisis.
The International Monetary Fund and the European Union provided a bailout from the threatening state bankruptcy for the country in 2008/2009, but in consequence the debt rate grew by more than EUR 20 billion, reaching the ratio of 120% of GDP. Since that time the Orbán government has been fighting the state debt with a range of conventional and unconventional methods.
Now the Hungarian National Bank (MNB) led by György Matolcsy, Prime Minister Viktor Orbán’s former “right hand”, has come to help them out, and they will not hesitate to use the foreign exchange reserves if necessary to make their new program successful.
The measures announced in late April will concentrate first on the bonds of HUF 600-1,000 billion that are placed with foreign investors and which the National Bank is planning to eliminate from its balance sheet. To put it more precisely, it would be beneficial if this money found its new home on the market of government bonds.
The MNB is willing to exchange turbulent liquidity for more stability and predictability. Since these long-term constructions will probably be less attractive for many investors, it is possible that a massive amount of the capital in question will be withdrawn from Hungary. According to the National Bank, there is no need to worry: if such a hectic withdrawal of positions should threaten to shake the market, the bank would use its high amount of foreign exchange reserves that they have stocked up with to the tune of about EUR 35 billion.
If the program that is going to be launched on 1 August (with its flanking measures coming into force in mid-June) is a success, it would contribute to a significant reduction of the debt. If Hungary’s refinancing needs would be reduced on the international foreign exchange markets, it would mean that the country risk would be reduced, which would enhance the chances of the rating agencies deeming the nation as a creditworthy state.
The Ministry of National Economy welcomed the MNB decision and will assist the plans with its instruments of monetary policy, making the forint-denominated debt financing play a major role.
It was not announced explicitly that the forint will be weakened further. The economic policy practised in the past four years has already weakened the domestic currency by 15-20%. In fact the investors have been communicated with since 2010 – disregarding the verbal lapses of the leading Fidesz politicians, who want to convince someone else each and every day –, feeding them the new dish in small bites: The still decent but intentionally weakened HUF exchange rate will be one of the major pillars of the new Hungarian competitiveness.
Since the MNB does not have an objective on exchange rates, it will not influence the National Bank in further sinking the interest rate that currently sees HUF 310 to the euro, as long as the rich liquidity on international markets and the global and domestic inflation rate and political stability allow it. Of course, the openly announced reduction of foreign exchange positions will – at least temporarily – further weaken the forint. The declaration, which has become almost like a social policy, to reduce dependency on the foreign currencies will justify this sacrifice.
The Centre of Foreign Debt Management (ÁKK) immediately announced after the announcement of the new MNB program that it is amending its own financing plans. This should be the consequence of the expected rise in the demand for long-term forint construction bonds. The original plan for this year was to replace the expiring foreign currency debt by new loans taken also in foreign currencies. This is how a successful issue of dollar bonds worth USD 3 billion could still take place before the parliamentary election last month.
There is about EUR 1.3 billion outstanding from the 2014 budget with no coverage from the previous issuances. ÁKK hopes to receive the major part of the missing money from private investments: the domestic investors are attracted by the euro-based PEMÁK-bonds, which are becoming more and more popular. (Within one year three series were traded in an amount above EUR 1.3 billion.)
The problems of the debt will not disappear even with Orbán’s consequently practised strategy, as there is another dimension to it. Hungary will be able in the medium term to stop the negative news about the country in terms of foreign debt that is still usual today. Probably even Orbán himself has no idea how he wants to deal with the internal debt hill in the long term, while at this very moment nobody cares about forint debts.
Historically low base rate looks to be last for now
The Central Bank of Hungary has lowered the base rate by 10 basis points to 2.5%, a historic low. Analysts expect that the bank has brought monetary easing to an end. In a statement published after the monthly meeting, the Monetary Council said the base rate had “significantly approached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the real economy”, adding that “changes in the domestic and international environment might influence this picture”. The statement did not explicitly refer to ending the easing cycle. The council said the “slight improvement” in risk perceptions associated with the Hungarian economy had provided room for a “cautious reduction” in interest rates. It said uncertainty related to the global financial environment warrants “a cautious approach to policy”. After the cut, the forint slightly weakened then strengthened against the euro to 308.40 after 309.60 in the morning. Emerging-market analysts in London broadly interpreted the cut as being the last in the easing cycle, which started in August 2012.