Economy 21 August 2019, 12:11pm

Hungary shows best performance since before IMF bailout

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Hungary’s general government gross debt declined to under 70% of gross domestic production, a level it has not been since before the country had taken out a loan from the International Monetary Fund in 2008, central bank (MNB) statistics revealed on Wednesday. The volume of the debt has increased further, though, which means the favourable trend in the debt-to-GDP ratio continued as a result of an increase in nominal GDP.

Now we can really forget about the IMF loan

Including the debt of the Eximbank, the general government sector’s Maastricht measure of debt was 68.7% of GDP, 1.7 percentage point higher than the 67.0% calculated on the basis of financial accounts methodology, the MNB’s preliminary financial accounts data showed today. Debt was 1.3 percentage points lower than at the end of March, and it marks the lowest level in nearly 11 years. The last time Hungary recorded a debt ratio of under 70% was in the third quarter of 2008, before turning to the IMF for a bailout. Net liabilities of the general government amounted to HUF 24,198 billion or 54.9% of GDP at the end of Q2, which marks a ten-year low.

Today is considered a turnaround in terms of the debt-to-GDP ratio because now Hungary’s back at pre-IMF times. In the third quarter of 2008, Hungary’s debt stood at 64.5% of GDP, which jumped to 71.6% in a matter of three months, as a consequence of several factors. (We had written about the reasons here, for instance.) Debt peaked at 83.5% in mid-2010, and after an extended period of stagnation it started to ebb gradually, only to break south of the 70% psychological level now. This is the result of basically two things:

The budget deficit declined that is dampening the increase of debt.
Economic growth has been robust for years that is reducing the debt-to-GDP ratio via higher nominal GDP.

We have to wait for the real breakthrough, tough

The real breakthrough has not been made just yet, as debt has kept on rising in nominal terms. The real big feat would be if this was also set on a persistently descending course, but in order to have that, the budget would need to accumulate surplus. At the end of Q2, general government consolidated gross debt at nominal value (or Maastricht debt) was HUF 29,519 billion, equivalent to 67.0% of GDP. This marks a HUF 161 bn growth over end-March and a nearly HUF 480 bn increase over the end of 2018.

So, even though there was a breakthrough in the debt ratio, Hungary is approaching a negative psychological threshold, namely that general government debt could shortly exceed HUF 30,000 billion at the current growth rate.

In other words, the reduction of the debt-to-GDP ratio has been mostly stemming from growth in the last few years. In a few brief periods, debt declined slightly in nominal terms as well, but these are merely ad-hoc fluctuations relating to one-off factors in debt financing. No turnaround in trend should be expected as long as there is a shortfall in the budget, as it must be financed from credit year after year.

The budget could still improve

According to MNB data, net lending of central government amounted to HUF 179 billion in April-June. Within financial assets, deposits placed with credit institutions significantly increased due to transactions, and assets related to transfers from the European Union also rose sharply. There was also a modest increase in long-term loans and tax receivables due to transactions, and the stocks of securities and of shares held by the central government declined. On the liabilities side, there was a substantial bond issuance in Q2. Primarily the household sector exhibited signs of significant demand (mainly thanks to the new retail government security, MÁP+), but non-residents made also a significant number of purchases. By contrast, there were net repayments by financial corporations. However, the stock of issued Treasury bills declined significantly due to transactions: there were large net repayments of Treasury bills by the household sector. With the two divergent trends basically offsetting each other, the stock of debt securities remained broadly unchanged, due to transactions, in the quarter. However, the stock of other liabilities rose slightly. Here, their accounts payable vis-à-vis non-financial corporations increased.

According to preliminary data, general government net lending amounted to HUF -517 billion or -1.2! of GDP in the four quarters to Q2, i.e. this is the deficit the budget accumulated in 12 months up to end-June.