Economy
Hungary likely to refrain from Eurobond issuance this year - Citi
Buyback auctions to start next week
ÁKK has increased its buyback plans to HUF 140 bn from HUF 45 bn earlier for the three-month period of March-May, according to updated official issuance plans.“The early start of buybacks this year is surprising as the debt agency usually covers annual financing needs before launching buyback auctions. Moreover, debt maturities are heavily front-loaded to the first half of the year in 2016," said Eszter Gárgyán, a Budapest-based analyst at Citi.
The government is planning to cover most of the maturing FX debt from HUF issuance this year and has EUR 3.8 bn of FX debt falling due between March-July (excluding retail FX bond), “which points towards heavy supply of local paper in the first half of the year," she added.
A number of factors suggest H1 financing need may be secured
In Gárgyán’s view, several factors suggest that local authorities are relaxed about the coverage of H1 financing needs. These are:- the ÁKK’s accelerated buyback plans,
- recent news related to strong retail issuance,
- a positive surprise in January’s budget performance and
- narrowing discount on the NBH’s IRS auction last week.
The analyst noted that Hungary’s fiscal cash reserves bounced sharply in January in line with the record HUF 92 bn January budget surplus and strong issuance of marketable securities and retail paper. Retail issuance reached HUF 190 bn in January covering 40% of original annual retail sales plans.
Comments by ÁKK CEO György Barcza suggest that February retail issuance has been similarly strong and the debt agency may raise its originally conservative (assuming only 50% of sales from 2015) retail issuance plans.
“We believe the interest rate premium offered by retail paper over bank deposits is likely to attract strong inflows from households throughout 2016," Gárgyán added.
Budget financing needs may be lower than original plans
Based on the January surplus helped by strong revenues and lower co-financing need of EU projects, annual budget financing needs may also fall behind the original plans of HUF 762 bn, Gárgyán thinks.“Moreover, privatization plans of state-owned banks and a potential unlock of EU fund transfers (of up to EUR 2 bn) withheld by the European Commission from 2015 due to technical issues, may reduce government financing needs further this year."
So far there is no official announcement about an agreement but local authorities have been quite optimistic that most of the funds will be unlocked with small discount.
Market implications
Gárgyán thinks that “the above factors suggest thatthe government is likely to refrain from Eurobond markets this year
apart from a small size (few hundred millions EUR) renminbi issuance, and the ÁKK’s buyback activity reducing net HGB issuance may support to the local bond curve."
