Economy
Markets, local investors find new faith in Hungary
As a key contributing factor to the confidence turnaround that played very nicely into the hands of the Hungarian government, the second half of the year has witnessed clearly supportive external market trends, predominantly as a result of intervention by the world's major central banks. On the other hand, credit belongs to Hungary's government for having carried out massive step-by-step fiscal consolidation this year. This has helped Hungary build its own brand of credibility in the government bond market, yet at the same time undermined the country's growth prospects.
Panic at kick-off.
The beginning of the year 2012 was marked by a severe investor confidence crisis for Hungary as the country's new Central Bank Act, adopted in the face of EU protests, ruled out any chance of a speedy credit line agreement with the EU/IMF. Given this outlook, fears of a potential government bankruptcy shot through the ceiling: Hungary's 5-year CDS premium skyrocketed (peaking near 650), while government bond yields rose above the 10% mark on some days.
These manifested signs of panic which had spread from the financial markets to the general public in the course of only a few days, partly as a result of irresponsible political scaremongering by the opposition which pandered to fears of a partial freeze and nationalization of personal bank accounts. The government firmly rebutted the allegations, underlining the fact that the National Deposit Insurance Fund provides a guarantee of up to EUR 100,000 per account.
The turnaround trigger
These statements, however, were not the tide-turners in the panic situation. What eventually allayed fears was an unprecedented face-to-face meeting of Prime Minister Viktor Orbán and National Bank of Hungary Governor András Simor to address the situation on 6th January, along with Orbán's follow-up statement who declared there was no such thing as a plan to seize bank accounts and stated the government's intention to reach agreement with the EU/IMF at the earliest opportunity.
This message gave market players and the local public the reassurance they wanted, setting off a massive financial market boom. Government bond yields and CDS premiums fell sharply, forint was seen soaring from its all-time low of 324 vs. the euro.
The exceptionally bad start of the year explains why the forint has been among the biggest gainers among emerging market currencies this year except for the last few days of December.
Although Hungary was lucky enough to escape a classic bank run, shaken retail banking confidence has left its mark on Hungary's financial sector, as manifested by a massive HUF 202 billion withdrawn from retail accounts in January 2012. It is difficult, however, to set the impact of the early January panic apart from another, simultaneous trend; specifically, the ongoing foreign currency mortgage payoff scheme which was in full swing at that time, with the result that a part of household savings disappeared in the process of paying down debt.
On the whole, though, retail clients used savings in a rather "diversified" manner; as a result, deposits were used to pay for an estimated one-third of mortgage debt repayment. Specifically, of the aggregate HUF 984 billion debt repaid as part of the scheme between September 2011 and March 2012, slightly more than HUF 300 billion may have come from deposit accounts. This Portfolio.hu estimate is supported by the May risk report of the State Financial Supervisory Auhotiry (PSZÁF).
Despite Prime Minister Viktor Orbán's early January pledge of a speedy agreement with the EU/IMF and the ensuing market euphoria, the next few weeks made it evident that such a thing was not going to happen. The road to an agreement was fraught with several legal obstacles and other stumbling blocks, which not only raised doubts about the government's alleged commitment but also impeded progress to a degree where even the commencement of talks became uncertain.
By the time official talks could finally begin in late July, a sudden thawing of a hitherto extremely negative global financial market environment was seen taking place, thanks to a statement by ECB President Mario Draghi that turned markets' dim view of the future of the eurozone around. Without doubt, the latter would not have been possible without the announcement of an unlimited Outright Monetary Transaction program by the European Central Bank.
The summer of 2012 witnessed a major decline in Hungary's country risk premium, primarily due to benign market sentiment internationally rather than to anything related to Hungary's economic fundamentals. This positive environment triggered a decrease in risk premiums throughout the region, with Hungary's CDS converging only moderately to the regional average by the end of the year. That is, Hungary's market perception has shown little improvement compared with the region's other countries since mid-2012.
The bond purchase programs announced by the ECB and the Fed in September resulted in profoundly improved global risk appetite, with a steady near-zero yield outlook in developed markets leaving many institutional investors with no other options than turning to emerging markets.
A large amount of the resulting capital inflow ended up in the Hungarian market - which, incidentally, stands quite apart from the rest of emerging economies in terms of fundamentals: Hungary has no claim to either economic growth or low public debt; not even can the country take a declining debt path for granted, given its weak prospects of growth. Of course the improved perception of Hungarian asset prices is partly the result of the government's unrelenting commitment to the 3% budget deficit target and public debt reduction, demonstrating its dedication by the announcement of several fiscal consolidation measures.
Whilst these have helped Hungary build its own brand of credibility (i.e. greater investor confidence in government bonds), they have further eroded the country's economic growth outlook.
The latter, however, seems to be completely ignored by foreign investors in their hunger for higher yields and trust in continued rate cuts by the NBH. By the end of 2012 the stock of foreign-held Hungarian government bonds rose to an all-time high of HUF 5,043 billion, as well as their share (43%) as a percentage of the total stock.
In sum, at 6% to 6.5% yield, Hungarian bonds have become a top favorite with investors. The near-zero interest rate environment in developed markets may hold out in 2013, and as a result, a percentage of investments are likely to gravitate towards emerging markets including Hungary. This could greatly ease the difficulty of financing Hungary's public debt.
