Economy 10 December 2021, 9:18am

Hungary postpones HUF 350 bn investments

Portfolio

After it was revealed that the budget deficit was gigantic in November and it became certain that Hungary would not receive the HUF 326 billion pre-payment from the EU’s recovery fund this year, the Finance Ministry announced late on Thursday that the government will postpone HUF 350 bn worth of investments in order to form supplementary budget reserves. The aim of the move is to ensure that the year-end debt to GDP ratio decreases without fully depleting liquid budget reserves. The Official Gazette has already published the relevant decree.

“The restarting of Hungary’s economy has been a success: GDP grew by 6.1%, investments by more than 12%, employment rose to 4.7 million, while unemployment dropped below 4%. This means there is now a smaller need to stimulate the economy through government investments. Hungary’s government therefore decided to postpone certain investments, increasing reserves by HUF 350 bn while decreasing debt,” the ministry said in a statement.

The background

The massive January-November deficit and the delayed payment of HUF 326 bn from the EU’s RRF facility prompted the government to postpone investments roughly in the value of the latter. The unusually high November deficit means the government will have much less room for spending in December than it usually does.

The value of government deposits held at the National Bank of Hungary (MNB) rose to a historic high of HUF 4,465 bn by the end of September, partly as a result of a HUF 1,500 bn FX bond issue shortly before, then fell to HUF 3,865 bn in October. November’s HUF 1,009 bn budget deficit presumably decreased the amount further, which may have been one of the main reasons the government now decided to fill up the reserves.

The other important reason is the debt rate. As the head of the Budget Council warned in a recent article published by Portfolio, it wil be a close call to meet the constitutional debt rule at the end of the year. Hungary’s debt must be lower than last year’s 80.4% of GDP by at least 0.1 percentage point. It stood at 80.5% at the end of Q3 even before the sizable deficits in October and November.

Based on the above, Portfolio believes the budget situation and the debt rule may have been the two main reasons for yesterday’s decision. By postponing investments and increasing reserves, the government can decrease the year-end debt-to-GDP ratio without depleting the budget’s liquid reserves held in the Single Treasury Account (KESZ) too much.

The first effect of postponing spending is a smaller deficit, not just cash-based but also the accrual-based deficit that is relevant to EU accounting. As there is still a large amount of money on the KESZ account, the government may even use this to buy back debt and improve the debt ratio before the end of the year.

Cover photo: Portfolio