BUDAPEST Feb 4 Hungary's strategy of making do
without International Monetary Fund help appears to be working
for its prime minister, Viktor Orban.
The country is preparing for its first international bond
sale since 2011 and is in a position to roll over its debt as
investors flock to its bonds' high yield.
Market participants expect a dollar bond will be launched
possibly as soon as this week or next. This promises to take
Orban, who has occasionally clashed over economic policies with
the European Union and IMF, a step closer towards funding the
country through a 2014 election.
And it will leave no constraint on the go-it-alone economic
policies that undermined a prospective deal with international
It is a similar policy to that taken by Turkey, which called
off IMF loan talks in 2010, to handle things itself. Orban,
indeed, is meeting with Turkish Prime Minister Tayyip Erdogan in
Budapest on Tuesday.
Politically, successful financing could help carry Orban,
who just after taking power in 2010 broke up an earlier IMF
programme, through a parliamentary election in just over a year.
Hungary, however, is paying a price for taxing its banks to
rein in its budget deficit and delaying structural reforms - its
economy is barely clambering out of its second recession in four
years, and investments have collapsed.
And expecting positive market sentiment will hold until
early 2014 is a big ask.
But given Hungary's high cash buffers, a global glut of
cheap money and the lack of a backlash after Budapest shunned
the IMF once again, it is a risk Orban seems willing to take.
He already believes there is light at the end of the tunnel.
"It's very simple: Hungary has become a European success
story. After eight years, we should be abrogated from the
excessive deficit procedure," Orban said in Brussels last week,
referring to the European Commission's judgement of countries
whose deficits are above 3 percent of gross domestic product.
The deficit was below 3 percent last year and his government
has pledged to keep it at that level in 2013, even though the
sustainability of his budget-plugging approach is questioned by
Brussels will decide later this year whether Hungary, which
has been monitored for repeated budget overshoots since 2004,
has finally done enough to keep a grip over spending.
But investors have been lured by Hungary's high yields
despite its debt being rated in the sub-investment grade
Hungarian bond yields, which hit close to 11 percent in
January 2012 when Budapest clashed with the IMF have come down
to around 5.5-6.3 percent and there is still room for yields to
fall as the central bank is pushing ahead with an easing cycle.
Foreigners' forint-denominated bond holdings are at record
highs of around 5 trillion forints ($23.49 billion).
"It's going to be difficult to perform as well as last year
because ... yields fell down sharply last year but certainly
there is good potential for attractive returns still in
Hungarian bonds in 2013," said Thanasis Petronikolos, head of
emerging market debt at London-based Baring Asset Management.
"So we think that 10-year yields at around 6.2-6.3 percent
offer value, we think they are attractive but there are risks
depending on global developments."
Orban's government, fearing a downgrade in the country's
rating to "junk", had asked for the IMF's help in late 2011.
But the downgrades came anyway and Hungary used the promise
of a deal with the Fund to shore up investor confidence.
Capitalising on the global hunt for yield, Budapest is
seeking to issue 4.0-4.5 billion euros worth of foreign currency
bonds this year to roll over expiring debt.
A successful bond sale would mean Hungary's financing is
safe this year, when it has a total of 5.12 trillion forints
worth of debts expiring, provided it can smoothly issue debt at
regular domestic auctions.
Some of this is similar to Turkey's experience, eventually
shunning the IMF but benefitting in investors' eyes from the
promise of a programme.
But the outlook for the two is very different.
Turkey has a public debt to GDP ratio of below 40 percent,
while Hungary's debt is still close to 80 percent.
Turkey is growing dynamically, largely thanks to reforms
carried out earlier, while Hungary's economy is weak even though
it runs a big current account surplus - unlike Turkey, which has
a sizeable deficit there, its main economic vulnerability.
Turkey is trying to control rapid loan growth and Fitch gave
the country its first investment-grade credit rating in 18 years
Hungary is struggling to revive lending as foreign banks are
withdrawing funding, and no rating agency has flagged the
prospect of an upgrade yet even though Fitch improved its
outlook to stable from negative in December.