Hungary Development Minister sheds light on goal with sweeping legislative changes

It's not about boosting tax receipts

The is not to boost tax revenues, said Nagy, adding that

who cares how much we collect,

the government's goal is to stimulate the savings market."

Banks will contact everyone

The stock of demand deposits of the population is around HUF 8,000 billion, compared to which the stock of fixed-term deposits is negligible. We can only persuade people to preserve the real value of their savings if we know who they are, so it is good that banks are reaching out to customers, said the minister.

We would like to contact the currency holders, but we don't know who they are, he said. In their information letters, the banks should tell customers how much they have lost by keeping their money in bank deposits instead of in government securities. The content of the information letter will be regulated for banks by the end of July.

Bond funds are not buying bonds, and that's a problem

When households do buy a security, 53% choose government securities, 35% mutual funds and 9% quoted shares, according to the most recent breakdown of security holdings. The holdings of mutual fund shares have risen sharply recently, by HUF 2,000 billion, with only bond funds pulling the market up, Márton Nagy said. He stressed that the problem is that these funds are not buying bonds but are acting as money market funds: they are putting money in bank deposits and not seeking liquidity in the government securities market. That is why it has now been introduced that funds must hold 95% of bonds in government securities and 20% of liquid assets in discount Treasury bills.

HUF 1,800 billion expected to be raised in the government securities market from institutions alone

At the level of the banking sector, an additional demand of HUF 1,300 billion will arise for long government bonds due to the changes in the windfall tax (some banks will have to increase their holdings of government securities by 40-50% to maximise the tax advantage), while investment funds are expected to generate new demand of around HUF 500 billion due to the rule changes applicable to them.

This means that institutions alone are expected to generate additional demand of HUF 1,800 billion in the government securities market. Estimates of the savings decisions of the general public are uncertain, but the amount of money that will be raised from them will certainly be measured in hundreds of billions of forints per year, said Nagy.

5-10% of household savings may shift to government bonds

From a liquidity point of view, the expected change in the structure of savings will be irrelevant for banks, but 5-10% of banks' retail assets could be moved, which banks could only stop at the cost of a large loss of profits. As their loan-to-deposit ratios are sufficiently low, they will typically not try to do either, said Márton Nagy.

There will also be steps in the supply of government securities

Asked by Portfolio (whether the ÁKK was late in raising interest rates last autumn), Márton Nagy said that he does not comment on government security supply issues, as this is in the Finance Ministry's purview. There will also be changes on the supply side, he added.

State to widen its room for manoeuvre on government security yields

The supply of government securities is constant, so the demand that is satisfied will not be higher as a result of changes, and therefore there is a need for action on the supply side in the interest rates on retail government securities, the minister said. The changes in the interest rates of retail government securities will allow for a better monetary transmission, as they will allow for a more rapid reduction of interest rates, Márton Nagy confirmed in response to a question from Portfolio. For institutions, the supply/demand ratio is clearly shifting towards higher demand, so auction yields are expected to fall.

Minister confident that banks will be able to halve their windfall tax next year

Some banks will have to increase their holdings of government securities by 40-50% if they want to halve their extra profit tax next year under the new rules, but the government expects all banks to be able to do so because they want to make higher profits. A limitation that has emerged in the talks is that foreign banks may run into group-level ceilings, but Márton Nagy expects this could be waived for profit reasons.