Hungary prepares for giant FX bond issue

The ÁKK raised the foreign currency issuance target relative to the HUF 644 billion equivalent target (as per the latest financing plan published on 10 May), establishing the possibility for the issuance of benchmark-sized international foreign currency bonds. The better than expected performance of the economy creates headroom in Hungary’s debt-to-GDP ratio, allowing additional debt issuance for the purpose of creating liquidity reserves for potential discretionary and strategic government spending (including but not limited to capital expenditures and asset purchases) and 2022 budget pre-financing.

Favorable market conditions and current market yields may provide an opportunity to come to market before central bank stimulus is dialed back on a global scale. The international bond issuance is aligned with the ÁKK’s strategic goal to further extend the average term-to-maturity of central government debt. The additional international bond issuance will not compromise the ÁKK’s strategic objective to keep the FX debt ratio of central government debt within the 10-20% benchmark range, the statement said.

The approved additional FX financing target provides the opportunity to raise up to EUR 4.5 billion equivalent of net proceeds via international foreign currency denominated bond issuance and also for potential liability management of FX debt subject to market conditions in accordance with the ÁKK’s prior practice, including but not limited to secondary market, OTC transactions.

Not so unexpected

It is unusual to make such significant changes to the financing plan mid-year, with the ÁKK typically just making some fine-tuning in reaction to market conditions. In recent weeks, however, several factors have pointed towards the government turning to the FX debt market again:

1. The forint-denominated bond market has faltered in recent weeks, and although an increase in yields in the past few days has apparently calmed the demand side of the market, it has become evident that the auction market cannot be relied on much further.
2. Further encumbering the forint government bond market could also be difficult as the National Bank of Hungary (MNB) has started to phase out its bond purchase (QE) programme. The central bank will buy less government bonds in the future, which is unfortunate when the financing requirement increases. This is another reason why increasing forint-based bond issues further would not be a good move.
3. The government has repeatedly implied that the EU’s Recovery and Resilience Facility (RRF) funding will not arrive in Hungary this year, or at least not in the planned amount. While this does not change the accrual-based budget deficit, it will increase the need for short-term financing. Should the European Commission accept Hungary’s recovery plan this fall, it would then transfer 13% (HUF 326 bn) in pre-financing before the end of the year, but the latest developments suggest that neither Hungary’s nor Poland’s plan will be approved this year.
4. The budget situation is not as rosy as faster-than-expected growth suggests. The government has already spent most of the extra revenue, and stimulus measures already in the pipeline will probably eat up the rest.

As the statement emphasises, the current financing plan does not serve further extra spending. The 7.5% of GDP deficit is already high enough (or unduly high as many believe), and increasing it further would look bad even if the falling trajectory of government debt could be maintained with a slightly higher deficit as well.

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