Scope Ratings says improvements in Hungary’s debt structure and the expected timely return of the economy to pre-Trisis growth mitigate an increased vulnerability of the country’s public finances to future shocks.
“An important absorption measure would be the further extension of public debt maturities,” says Giulia Branz, analyst at Scope. “Doing so could reinforce Hungary’s fiscal resilience by reducing high gross annual financing needs, although a critical issue remains the capacity of domestic investors to absorb higher volumes of government bonds issued by the Hungarian State Treasury – especially at longer durations.”
Scope draws five main conclusions from its latest analysis of Hungary, illustrated by five charts in a new report, available here.
Upward revisions to public deficit and debt, but significant improvements in debt profile
“We have made an upward revision in our deficit forecast to 10% of GDP in 2020 after higher spending in response to the pandemic, expected further extension of fiscal support, and a deep recession,” says Branz.
Nevertheless, a robust recovery in nominal output is foreseen in the years ahead, which should ensure the gradual decrease of debt back toward 75% of GDP by 2024.
A significant improvement in Hungary’s debt profile over the past decade, including a substantially lowered share of foreign-currency denominated debt, has reduced external sector risks and helped to advance Hungary’s domestic capital market liquidity, especially via the issuance of retail bonds.
Constraints from low average debt maturity and domestic sector’s limited debt absorption capacity
At the same time, Hungary still faces a relatively low average public debt maturity – only 4.4 years for HUF-denominated debt – resulting in high yearly gross financing needs relative to other countries’ in Central and Eastern Europe.
“The fact that domestic debt holders have a limited capacity to absorb longer-dated government bond issuance compared to the tolerance of international investors may pose a constraint on the government’s objective of extending debt maturities,” says Branz.
The benefits of fairly benign market conditions
Hungary benefits from fairly stable market conditions over recent months, with current 10-year yields around 70bps above pre-crisis levels. Hungary’s international capital market access was also successfully tested through the placement of a EUR 500m bond denominated in Japanese Yen (Samurai Bond) this month.
“The mix of lower interest rates and the quantitative easing of the Magyar Nemzeti Bank (MNB) have provided robust support for Hungary’s debt management agency, ÁKK, to complete a large share of its funding needs for 2020, including 100% of the planned foreign-currency debt issuance,” she says.
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Giulia Branz is Associate Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH.