Hungary rocks the markets: the background
7 June 2010
Comments from the new Hungarian government drawing comparisons between the fiscal position of Hungary and Greece have triggered a fresh wave of market volatility as well as raising serious doubts about the competence of the new administration. But is Hungary, less than two years on from an IMF/EU bailout package, really in such dire fiscal straits?
Hungary is not Greece
While there is no doubt that Hungary is in a difficult situation, it is in a completely different boat to Greece. Unlike Greece, Hungary’s economy is now pulling out of recession. Exports to the EU are recovering, while inflation has eased, allowing the central bank to cut interest rates over recent months. The current account, meanwhile, has shifted to a surplus.
From a budgetary perspective, Hungary has had large fiscal deficits in recent years, rising to more than 9% of GDP in 2006. Its subsequent inability to issue debt lay behind Hungary’s need to seek assistance from the IMF and EU in autumn 2008. However, the deficit was reduced to 4% of GDP in 2009, in line with the requirements of the IMF/EU programme, a significant achievement given that Hungary’s economy contracted by 6.3% last year. And at a little less than 80% of GDP, the government debt stock is also about 50ppts lower than that of Greece.
There is no reason, therefore, why Hungary should face immediate budget financing pressure. With foreign currency reserves of about €32bn at end-May, the government should have little difficulty making its scheduled interest and repayments of foreign currency-denominated debt, which total about €3.2bn, over the coming 12 months.
Any financing pressure would therefore be seen in the local currency debt market. The government has bill auctions scheduled at least twice a week over coming weeks (with a 3-M bill auction due tomorrow and a 12-M auction due Thursday), and the next HGB floating rate bond auction is on 1 July. Overall, the government has about HUF1.9trn (€6.6bn) of HUF-debt principal and interest due over the coming 12 months, with a first principal repayment spike in August 2010 of HUF327bn.
But if Hungary were to find itself unable to issue, multilateral assistance should still be available. Hungary’s IMF/EU programme, worth $25bn, was recently extended until October, while the government has not drawn on the fourth and fifth tranches this year, with those funds being held in reserve. This means Hungary still has about €2.5bn in reserve, while it could obtain a further €5bn if it can reach agreement with the lenders at the next review of the programme.
Finally, unlike Greece, Hungary is not locked into a fixed exchange rate regime, and a weaker exchange rate has already helped to restore growth.
Government has hopefully learnt its lesson
Nevertheless, last week’s episode has caused much damage to the credibility of the new Hungarian government. It has not only demonstrated its lack of experience and competence, but by casting doubt on official figures, the new government has also undermined the credibility of the government accounts in general – a significant problem in the context of Greece. And while it is due to unveil its economic plan shortly, we fear that populist measures will dominate.
Market sentiment towards Hungary therefore looks set to remain negative in the near term, with asset prices likely to remain volatile and Hungary’s sovereign ratings potentially coming under further pressure. And while Hungary’s peers in Central and Eastern Europe have stronger economic and fiscal fundamentals, some degree of contagion is inevitable. For everyone’s sake it is to be hoped that Hungary’s new government has learnt its lesson, and now realises that populist rhetoric and policies intended for internal consumption can have far-reaching ramifications in the current febrile market environment.
Vlad Sobell, Senior Emerging Markets Economist
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