Investors turned out in force for Hungarys return to the global bond markets last month. The dual-tranche deal the first international market outing from Hungary since May 2011 attracted nearly $12.5 billion of orders, enabling the double-B rated sovereign to raise a total of $3.25 billion across the five-year and 10-year maturities.
In view of Hungarys failure to conclude a long-awaited support facility with the IMF previously seen as a necessary precursor to issuance analysts were quick to attribute the strength of demand to excess liquidity in emerging market bond funds. However, Gyula Pleschinger, minister for taxation and financial policy affairs, insists that although investors need to put cash to work had "definitely contributed" to demand, it had not been the primary driver of the deals success.
In an interview with Euromoney, he says: "Investors recognized the governments achievements in managing the budget deficit and putting the debt-to-GDP ratio on a sustainably declining path." Hungarys budget deficit for 2012 is expected to come in comfortably inside EU mandated levels at 2.7%. Since taking office in April 2010, the Fidesz administration led by Viktor Orban has overseen a reduction in the debt-to-GDP ratio from 81.3% to an estimated 75% by the end of December.
Nevertheless, the methods, including levies on the largely foreign-owned banking sector, have been controversial. Hungarys economy fell back into recession in 2012, with fourth-quarter data released in February showing GDP down a worse than expected 2.7% year on year. Full-year GDP is widely expected to have fallen by about 1.5% and most analysts have followed the World Bank and European Bank for Reconstruction and Development in predicting a further contraction of 0.3% and 0.1% respectively in 2013.
Even so, Pleschinger is confident that with external financing worries alleviated by the success of the dollar bond sale and the deficit under control, the government will be able to reverse the downward trend in the economy. "The primary goal over the past two years has been to achieve fiscal stability," he says. "That job is done, so now our focus is on encouraging growth."
Much of the emphasis in the growth programme will be on restoring external flows via increased uptake of EU funds, foreign direct investment and the development of new export markets to make up for declining demand from western Europe. Pleschinger says the government is further looking to increase domestic activity by encouraging banks to lend to SMEs and households.
The latter would require a reversal of the dramatic deleveraging currently running at the most rapid pace in any European transition country, according to an EBRD report released in January since the introduction of a tax on bank balance sheets in 2010. Initially designated as a "crisis tax" and due to expire next year, the levy is one of the key areas of contention between the Orban government and the IMF, along with alleged encroachments on the independence of Hungarys central bank. It was made permanent in November.
Combined with the slowdown in the broader economy, the tax has taken a heavy toll on banks bottom lines. But Pleschinger insists most remain "committed to the country". He says: "Obviously they are not happy with the continuation of the banking tax, but they are prepared to collaborate on new structures and take a fresh approach to rebuilding their profitability."
Under new proposals, banks would receive tax breaks for lending to small businesses and advancing mortgages, which the government sees as crucial to revitalizing Hungarys ailing construction sector. A similar programme in 2011 met with a muted response, although Pleschinger is confident that more aggressive rebates will overcome banks resistance to the scheme.
"We are in informal talks with the banks on how we can incentivize them to increase lending in a way that will really be attractive enough for them, and I think that by the end of the spring we will have a new agreement in place," he says.
In a recent research note, Nomura strategist Peter Attard Montalto described the likelihood of the Orban government meeting targets for reversing deleveraging as very low. He said the view that fiscal consolidation and structural reform are finished was also "extremely complacent". Along with other seasoned Hungary watchers, Montalto sees substantial downside risk in the success of the sovereign bond issue.
"The pressure is off the government now well into the second half and hence we now have room for a slew of unorthodox policies," Montalto notes. The main areas of concern include a proposed write-down on Hungarian municipal debt, potential budget amendments if the economy ministrys GDP forecasts prove optimistic, and the choice of a replacement for outgoing central bank governor Andras Simor.
The central bank issue is seen as particularly sensitive, given the high level of nonresident holdings of domestic government bonds cited by Moodys as 46% of the total at end November and substantial exposure of corporates and households to foreign-currency debt. Recent pronouncements by Orban and economy minister Gyorgy Matolcsy, who is widely tipped as the favourite to succeed Simor, have raised fears that the government might look to boost growth by devaluing the forint.