Hungary’s Economy Minister Mihály Varga has notified Reza Moghadam, Director of the IMF’s European Department in a letter on 25 July that the country intends to repay a credit taken out in 2008 before it becomes due, by 12 August 2013, the ministry said in a statement on Monday. The decision to repay the debt “ahead of schedule" is no surprise, as several government officials, including the Prime Minister and Varga himself in an interview with Portfolio.hu last week, have already indicated that intention.
The ministry noted that early repayment is available for those countries that possess “an appropriate level of reserves, disciplined fiscal policy and favourable perception by investors."
Given that Hungary meets all these conditions it has the opportunity to clear its IMF debt before it becomes due, the ministry added.
It reminded that “the agreeable market environment and investor confidence towards Hungary has resulted in the most favourable yields and five-year CDS spread which reflects the country’s risk perception. Courtesy of that the Hungarian state was able to build up considerable deposits amidst reassuring financing conditions. Considering that resources for the early repayment of the IMF credit are at disposal, the Government has decided to make payment ahead of schedule."
The Hungarian state (excluding the central bank) had drawn EUR 7.5 billion worth of credit from the IMF, EUR 2.2 bn of as principal remains to be repaid. The last larger tranche becomes due in March 2014. By repaying the full debt to the IMF the cabinet “takes an important step towards an ever higher ratio of market-based financing and also ensures the budget savings on interest expenditures. The balance of the foreign currency reserves accumulated for specifically this purpose will remain at a safe level even after the early repayment," the ministry added.
PM Orbán has also addressed this issue over the weekend and Portfolio.hu had a separate analysis on the subject before.
According to the latest figures (end-June), the stock of the government’s deposits at the central bank dropped to a six-month low of HUF 1,531 billion, of which HUF 1,055 bn were denominated in foreign currency. Calculating with the official NBH exchange rate prevailing at the end of June, state deposits amounted to EUR 5.2 bn, EUR 3.57 bn of which were in foreing currency.
The EcoMin’s statement does not specify which one of these reserves will be tapped to repay the EUR 2.2 bn IMF debt. Should only the FX reserves be used, these would decline by some 60% to EUR 1.4 bn by the end of August, which would not be enough to pay the market-based FX bonds becoming due next January (EUR 1.0 bn) and in May (cc. EUR 600 m). Therefore it is possible that the two funding sources, i.e. the HUF and FX reserves, will be used simultaneously, which would allow the latter to remain at a secure level, as the ministry mentioned.
The fact that the state will clear its debt towards the IMF from funding already raised on the markets means that as a result of the transaction public debt will automatically decline (by EUR 2.2 bn or cc. HUF 650 bn). This corresponds to 2.0-2.5% of GDP, which means the debt-to-GDP ratio could go down to around 80%. For our analysis on the debt path and the risks related to the debt rule click on the link below.
“IMF as a thorn in his side, and did not like what he saw as the griping from the IMF over economic policy impulses in Hungary. The government had pre-announced their intention to request the closing of the local IMF office, sending the resident IMF rep packing in effect," commented Timothy Ash, strategist at Standard Bank in London.
In his view, it would also be fair to say that relations between the IMF and the government reached something of a low point over the past year - “but it is quite amazing that only in late 2011 the government was hinting of a new IMF loan programme, and kept up the charade of this for most of 2012."
Ash believes that with elections now less than 10 months away “the government is keen to send a message to the electorate that it is no longer in the pockets of the IMF, and has greater policy flexibility in the run up to the polls."
Ash thinks the cabinet will “no doubt argue" that (i) “pre-payment will reduce debt service costs/pressures over the next 18 months and (ii) this will cut the gross public sector debt/GDP ratio by around 2%, as the govt aims to cut this ratio from around 78% at present to a longer term target of 50%."
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