Foreign Investors Await Real Economic Plans From Hungary, Not Election Promises

In this regard, the next three months should be relatively calm on the FI market, he added. The primary market is basically back to normal, but the secondary market is far from operating seamlessly, which has prompted the government to start drafting a new package of measures. The details of that, however, are not yet available.

Even if the state decided to consolidate some of the debt of loss-making state-owned enterprises around the autumn, it would still have a marginal impact on the country’s financing requirement this year, Borbély said. He also sees a number of domestic and foreign factors why investors’ concerns about Greece’s government debt would exert only a very limited impact on the local fixed income market.

The primary market is already fine

Foreign investors bought HUF 37 bn worth of Hungarian debt at the ÁKK’s first bond auction this year (14 Jan) and purchased another HUF 37 bn two weeks later. Borbély said they’re purchasing behaviour is rather cyclical - they typically buy bonds in January-February then stop, sell some and start buying again in end-Aug and September -, adding that in this regard, 2010 turned out as usual.

The stock of Hungarian government securities held by non-residents grew by HUF 171 bn from the end of 2009 until 3 February, he added.

Borbély said election cycles generally leave demand for Hungarian debt unfazed.

Foreign investors "are not really interested in political campaign periods," he said.

"The key is what programme the new government will announce when it comes to power."

Borbély recalled that the forint started to weaken and gov’t securities yields began to rise when the new Prime Minister came up front with a new programme in June 2006. "Then things settled down a bit by the autumn. That is why I do not forecast "stormy weather" for the spring."

He stressed that developments outside Hungary’s borders tend to have a much greater influence on the market than domestic events.

Borbély said the primary government securities market "returned to normal" in the fourth quarter of 2009 and that he expects no change in this regard in Q1 either.

"In a six-week cycle the issued amounts were as large as or even bigger than in peacetimes."

The secondary market, however, has not fully recovered yet.

"There have been some improvement on the secondary market recently, but by far not as impressive as on the primary market. [...] By now at least the pricing mechanism with primary dealers works acceptably. [...] but we are still far from the pre-crisis status," Borbély said.

He reminded that turnover declined greatly on global debt markets, as well.

"In order to improve the situation there is another package of measures in the making, but even this is unlikely to bring about a breakthrough without a substantial improvement on international markets," Borbély added.

No increase likely in non-residents’ HGB holdings

The stock of HGBs held by non-residents has been hovering in a range between HUF 2,150 bn and HUF 2,400 bn for about a year now, with no indication that a breakout in either direction would be imminent. Borbély said the stock of non-residents’ holding of Hungarian government securities is unlikely to increase markedly until Hungary’s sovereign debt ratings improve in merit. A more positive assessment of the local FI market would also help, he added.

On 2 October 2009, Standard & Poor's Ratings Services revised the outlook on Hungary to stable from negative, which was a moderate move in the positive direction in this regard, he added.

Borbély pointed out that non-residents’ HGB holdings decreased by over HUF 1,000 bn over the past two years, partly due to a cut in the country’s ratings (as Hungary has approached or even reached the lowest investment grade at rating agencies).

This made funds investing in Hungarian assets even more cautious about local debt instruments.

"Until there is no major progress [in credit ratings] I would not expect any substantial increase in non-residents’ HGB holdings," Borbély said.

"This is partly why the ÁKK has changed its debt management strategy and will adjust its issuance structure primarily to the domestic investors’ propensity to save. This means it does not want to sell more and more government securities to foreign investors at all costs."

Debt consolidation and spillover from Greece

A potential debt consolidation of loss-making state-owned enterprises has been on the agenda recently, as it would affect this year’s budget deficit, as well.

Borbély, however, does not believe the impact would be big on the cash flow deficit, expecting a larger influence from such move in 2011.

The soonest the new government may amend the budget act is the autumn of 2010, which means the state will need to cover the interest expenses of the assumed debt of state companies from that time. "[...] logically, this should not imply a major increase in interest expenses therefore the 2010 (cash flow-based) budget deficit could go up by only a few billions of forints. A more pronounced impact is expected in 2011," Borbély said.

He confirmed that the ÁKK will consider auctioning off variable rate bonds, possibly by the end of March, if they find adequate demand for such instruments. The issuer is currently testing the waters in this regard. It has no preferred maturity and will try to be market-oriented when deciding on that, he added.

Borbély is upbeat about a potential spillover from Greece, saying it is a good sign that "Hungary is once again mentioned on the same page with the Czech Republic and Poland, and not with those economies in the region that show a weaker performance. This may imply that foreign investors’ responses to a possible crisis in the region may exert a less negative influence on Hungary."

Source: Portfolio Online Financial Journal