ÁKK chief: gov't should do everything in its power to keep country in investment grade
Crisis, sovereign default, rising yields
According to Dan Bucsa, Central and Eastern European economist at UniCredit Bank, the reason why György Matolcsy, Governor of the National Bank of Hungary (MNB), said earlier that Hungary was on the verge of a crisis was because the Hungarian energy import bill soared last year and EU funds were not coming in, increasing the vulnerability of the Hungarian economy.
Asked about a possible national insolvency, Zoltán Kurali, CEO of the Government Debt Management Agency (ÁKK), said:
It's just like Columbo's wife: everyone knows the idiom, but few have ever met her.
He acknowledged that the Hungarian government bond market environment was difficult last year, but there were also problems elsewhere, with investors in many developed markets losing money as yields rose. He pointed out that there was no liquidity problem with higher government bond market yields. He stressed that the rise in bond yields in the US and developed markets is clearly one of the most important factors in the path of Hungarian yields. Behind the rise in foreign yields is the fact that economic growth has remained buoyant in the US and inflation is also on a different path than central banks had expected. On the expected path of US government bond yields, he said:
I do think we've done the hard part, but I don't think there will be a significant drop in yields.
Dániel Bebesy, senior portfolio manager at Erste Fund Management, noted that with US government bond yields rising, the share prices of major US-listed banks show that something is not right - they may be sitting on significant unrealised losses.
He says that high interest rates are causing difficulties for banks' lending opportunities, and there is considerable pessimism in the markets as
everyone is wondering what kind of credit market outcomes the rise in yields could lead to.
Hungarian debt financing and credit rating decisions
Returning to the issue of Hungarian sovereign debt financing, Dan Bucsa stressed that he is not worried about the demand for Hungarian government bonds, but
there is a price to be paid for raising funds.
He believes that the biggest issue in the Hungarian market is the significant new debt issuance and how the Hungarian government can finance it. He pointed out that the debt ratios of Serbia and Croatia are already lower than those of Hungary, and the question of when the Hungarian debt ratio will fall and at what pace was also an important one.
During the conversation it was also discussed that in December both S&P and Fitch will assess Hungary's credit rating, and what is to be expected in the next year in terms of credit ratings. Péter Kiss, Investment Director of Amundi Fund Management, expects that Hungary will be rated in the recommended category by all three rating agencies in a year's time. He cited the recent example of Romania, where the rating agencies gave time for the problems to be sorted out. On the Hungarian rating round in December, he noted that
Fitch may downgrade the country because of the negative outlook, but in its latest commentary, the rating agency struck a more positive tone.
On S&P, he noted that they have a stable outlook on our credit rating, but it is possible that they could downgrade it to negative, and if they do it too, the impact would be much greater, he added.
Zoltán Kurali said that the example of South Africa shows that if a country is not recommended for investment, many investors cannot buy its securities. Referring to the Hungarian situation, he said that
Economic policy should do everything in its power to avoid this.
He also noted that in euro-based government bonds, there are more "sensitive" investors who cannot buy in such a situation than in dollar-based bonds.
As Dan Bucsa sees it, "it is important that even if a downgrade occurs, there should not be any more - this should be avoided". According to their expectations, 18 EU member states could be subject to an excessive deficit procedure in 2024 for failing to keep their deficits below 3% of GDP, he pointed out.
It is not a Hungarian issue, and we do not know how the rating agencies will react to this situation.
Péter Kiss sees financing Hungarian public debt as difficult next year, given the upside risks to both this year's 5.2% deficit target and next year's 2.9% deficit target. He expects Hungary to miss next year's target due to lower economic growth and higher inflation. He added that if external conditions remain favourable, it does not particularly matter whether the deficit is 3% or 4%, because it can be financed. He also pointed out that if the deficit target for next year remains below 3%, while interest expenditure reaches 4% of GDP, the primary balance would have to reach a 1% surplus, which is a significant challenge.
On the debt financing outlook, Zoltán Kurali pointed out that
The financing environment for next year is not a difficult one.
He argued that if there is no substantial redemption by the public, the maturing public debt will be around HUF 5,000 billion, which is 7% of GDP, and "has never been so low". This - including the 2.9% deficit expected for next year - is below 10% of GDP, and much more has had to be financed in recent years, he pointed out. He also highlighted as a positive phenomenon that 80% of the interest expenditure of around 4% of GDP goes to domestic retail and institutional players, and
If the interest received is reinvested, the deficit is financed, and then it is a comfortable situation.
He recalled that in 2019 the ÁKK paid 0.6% of GDP to foreign investors and next year 0.8-0.9%, so the increase is only small.
Forint exchange rate outlook
Bebesy Dániel a forintárfolyam kilátásait firtató kérdésre megjegyezte: az MNB kamatvágásainak beindulása óta kissé gyengült a forint, de ez összhangban volt a régiós devizák teljesítményével. Ez jórészt azért történt így, mert a magyar gazdaság külső egyensúlya nagyon jelentősen javult, az előretekintő reálkamat pedig még mindig magas, így
van egy támogató háttér a forint számára.
Asked about the outlook for the forint exchange rate, Dániel Bebesy noted that the forint has weakened slightly since the MNB started cutting interest rates, but this has been in line with the performance of regional currencies. This was largely because the external balance of the Hungarian economy has improved very significantly and the forward real interest rate is still high, so
there is a supportive background for the forint.
He added that in recent months, the MNB has indicated that it will continue to maintain a cautious stance on interest rate cuts, maintaining a positive real interest rate. At the same time, the outlook for the forint exchange rate is undermined by "very strong signals" from the government suggesting that the positive real interest rate should not be maintained, and there have also been suggestions of raising the inflation target.
He recalled that ten years ago in Türkiye one could read news that if inflation fell into the single-digit range, things would be fine, and he pointed out that this was what government communication seemed to suggest in this country too. The MNB has announced that it has broken with monetary policy based on a depreciating forint exchange rate, the senior portfolio manager noted at the end of the discussion, but expressed doubts as to whether the government has also broken with economic policy, which had been based on a depreciating forint exchange rate as one of its pillars, alongside wage policy.
Cover photo: Portfolio
