February 4, 2013 / 3:35 PM / 6 years ago

CEE MONEY-Go-it-alone Hungary may be managing without the IMF

BUDAPEST, Feb 4 (Reuters) - 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 lenders earlier.

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 the IMF.


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 category.

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 in November.

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.

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