beyondbrics

After several years of being central Europe’s bad boy on the bond block, Hungarian debt has had a remarkable six months. Foreign investors, noting the government’s determination to curb state expenditures and rein in debt, have piled into local bonds to hold what are now record levels – Ft 3,600bn (€13.7bn) – more than one third of the total amount.

“It’s been an outstanding performance,” with US dollar investors making over 20 per cent annualised gains on medium and long term bonds from a combination of higher prices and exchange rate movements, says Istvan Horvath, macro analyst with UniCredit Bank in Budapest.

Compared to earlier investor concerns, this is real reconciliation between Viktor Orban, the country’s energetic, energised, self-declared “Hungary first” prime minister – and the markets.

But can it last? So far, so very good, say observers; but the most spectacular practical move – nationalising mandatory private pension funds to trim state debt from a little over 80 per cent to 76-77 per cent of GDP – is one-off and only buys breathing space.

More fundamental is the economic programme; an austerity package dressed up in the patriotic clothes of Kalman Szell – a former fiscally prudent, if otherwise largely forgotten prime minister – with an emphasis on curbing government expenditures and upping economic expansion.

Cuts will be made in areas such as administration costs, and state subsidies for pharmaceuticals and transport. In addition to reduced unemployment benefits, there will be a drive to create 400,000 jobs by 2015 and raise the employment participation rate to at least 66 per cent – all of which will underpin a steady rise in economic growth of up to 5.5 per cent by mid-decade. All this frenetic new activity will result in a budget deficit averaging around 2.5 per cent in the next three years.

Its goals are admirable, but, as Adam Keszeg, macro analyst with Raiffeisen Bank in Budapest, points out, it is also “very ambitious” – he puts economic growth this year, for example, at 2.5 per cent – against a ‘conservative’ government forecast of 3.1 per cent (although his forecast of 3 per cent for next year matches the government’s lower scenario).

Furthermore, the government, in its zeal to curb the high rates of early retirement in Hungary, both for (often dubious) health reasons and – as standard practice until now – for the police, prison and fire service workers, has upset several formerly compliant trade unions.

After some labour leaders accused Orban of forcing these measures through with contempt for the consultation process, demonstrators took to the streets across the country in June. Although the government’s resolve appears unshaken, such protests inevitably raise fears that plans may be watered down.

For now though, foreign investors seem confident that the government will largely follow through on its promises, and as Horvath notes, sentiment has been further strengthened by Fitch’s recent tweak to its ratings, moving Hungary’s outlook to stable from negative, and China’s pledge last month to buy into Magyar state debt.

Keszeg foresees the immediate future to be relatively calm, though he expects sentiment to remain firm.

“With the financial crisis in Greece [seemingly] avoided, we expect yields to come down from the present 7.2 per cent to below 7 per cent, but nothing like the last six months.”

Despite being bullish on long-term inflationary trends, and confident that exports and the inflow of EU funds will be sure support for the forint, Horvath too expects a “period of consolidation” for the market.

“I don’t expect a recommendation to go overweight on Hungary for the time being,” he says.

He also appears to believe the government can at least partially deliver on its economic programme – but admits that “the key will be how the structural reforms proceed.”

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