FLASH REPORT FISCAL ANALYSIS

Transcription

1 FLASH REPORT 18 Aug 2014 As we expected, Hungary s consolidated gross government debt increased by 0.7pp to 85.1% we forecast lower than 80% gross public debt at the end of the year In line with our expectations, Hungary s consolidated gross government debt at face value (Maastricht debt concept) was 85.1% of GDP at the end of Q2 2014, preliminary statistics show. The 0.7pp higher debt ratio vs. Q can be mainly explained by positive HUF debt transactions as the Government Debt Management Agency (GDMA) issued HUF bonds at much higher values than the historical averages in Q2. A bond analysis (in an annex) shows that the stock of the HUF bonds held by resident financial institutions grew by HUF 435 bn in Q2. At the same time, the stock held by non-residents increased by HUF 472 bn. The share of financial corporations is on an increasing trend. We may expect a continuation of this trend as the National Bank of Hungary announced the socalled Self-Financing Plan. At the same time deposits on the Treasury account increased by 1.5% of GDP. As a consequence, public debt net of financial assets (our concept for net government debt) decreased by 0.8pp. Looking forward, we think that the government will seek as low end-of-year debt level as possible. This is because the EU-mandated debt reduction is pretty strict. Taking into account the high level of liquid financial assets, we think a below 80% public debt rate is achievable at the end of the year. According to the fresh preliminary financial accounts published by the National Bank of Hungary (NBH) today, consolidated gross government debt ratio at face value (Maastricht debt) further increased by 0.7pp to 85.1% at the end of Q Chart 1 The consolidated gross government debt and OTP s estimate for net public debt* (as % of GDP) Trading Desks Dealing code: OTPH Live quotes at OTP BLOOMBERG page This report is available at BLOOMBERG: OTP/Macroeconomics Research page Fixed Income Desk András Sovány SovanyA@otpbank.hu Benedek Károly Szűts SzutsB@otpbank.hu FX Desk Géza Polányi PolanyiG@otpbank.hu András Marton MartonA@otpbank.hu Gábor Réthy RethyG@otpbank.hu Money Market Desk Gábor Fazekas FazekasGa@otpbank.hu Gábor Heidrich HeidrichG@otpbank.hu Judit Szombath SzombathJ@otpbank.hu Sources: NBH, OTP Research *the following liquid financial assets are deducted from gross debt: Treasury s deposit at the National Bank of Hungary (HUF and FX deposits) and financial assets from the former mandatory pension funds (Pension Reform and Debt Reduction Fund). The times series of the liquid financial assets are on Chart 5; 2014/15 year end forecast is made with EURHUF at 308. HUF net debt transactions served as the main debt increasing factor Net debt transactions amounted to HUF +434 bn (or +1.5% of GDP) in the second quarter see Chart 2. FX net debt transactions were negative (HUF -190 bn) as the GDMA tries to reduce the FX-share of the public debt. Analyst Szilárd Kondora KondoraSz@otpbank.hu 1

2 The HUF value of outstanding FX-debt increased by HUF 65 bn as EURHUF was 1% higher at the end of Q2 vs. Q1. Higher nominal GDP contributed to a declining debt ratio (-1pp). Chart 2 Decomposing the change in consolidated gross debt in Q (at face value, in HUF bn) Sources: NBH, OTP Research; net debt transactions split between HUF and FX is an estimation: according to NBH data net FX debt transactions at market value made up HUF -190bn, net HUF debt transactions is a residual item HUF bond sales were above historical averages, we expect a lower supply on the government debt market in the remaining part of the year As one of the consequences of the Self-Financing Plan, the GDMA faced an increasing demand for HUF denominated bonds. In the second quarter the GDMA sold bonds way above the historical average. As we know the annual financing plan of the GDMA, we can calculate the amount of bonds to be issued in the remaining five months of the year in various bond classes. As to the remaining part of the year, we expect a lower monthly average supply on the government bond market than in the past few months. In the case of fixed coupon bonds as well as floating coupon bonds, even lower than historical average sale is enough in Aug-Dec to fulfil the annual financing plan of the GDMA. Chart 3- Fixed coupon bond issues (monthly, HUF bn) Chart 4 - Floating coupon bond issues (monthly, HUF bn The government s liquid financial assets further increased above long-term averages As investors money is deposited on the Treasury accounts until it is used for deficit financing or debt repayment, the fiscal buffers increased by 1.5pp of GDP in the first quarter see Chart 5 on the next page. As a consequence, public debt net of financial assets (our concept for net government debt) decreased by 0.8pp also see Chart 1. 2

3 Chart 5 Liquid financial assets of central government (as % of GDP) Sources: Hungarian State Treasury, Pension Reform and Debt Reduction Fund, OTP Research Looking forward, we think that the government will seek as low end-of-year debt level as possible. This is because the EU-mandated debt reduction is pretty strict. Taking into account the high level of liquid financial assets, we think a below 80% public debt rate is achievable at the end of the year. The simplest way to achieve that would be reducing the balance of the Treasury accounts again (this is what we expect). Manipulating exchange rates (to reduce HUF value of FX denominated debt), and reaching below-target deficit may also come handy. 4Q rolling financial requirement at 3.1% of GDP in Q according to today s data an emerging discrepancy with the deficit data The 4Q rolling net financing need of the government sector reached -3.1% in Q according to the preliminary financial accounts. This figure has been a good proxy of the government sector s balance, but an emerging discrepancy was observed in the previous quarter, a background of which is not yet unveiled. The HCSO will release second-quarter deficit statistics at the beginning of October. The budget balance target of the government is -2.9% for Chart 6 Government balance according to NBH and CSO statistics (as % of GDP) Sources: NBH, CSO, OTP Research We forecast 2.9% deficit for 2014, which equals the government s target of 2.9%. 3

4 Government debt structure (annex) From Q onwards, the general government debt practically comes from the central government debt (registered by the GDMA) as the central government assumed almost the entire local government debt in Q and in Q (see Chart 7). Chart 7 General government debt structure (HUF bn) Sources: GDMA, NBH, OTP Research *Preliminary data, OTP Research forecast Recent developments in the central government debt structure: IMF loans declined and finally all the remaining loan was repaid ahead of schedule in August 2013 (see Charts 8-9). The second tranche of the EU loan (EUR 2 bn) is due in November The HUF part of the total debt has stabilized around 60% (latest data was 59.3%, - see Chart 9). According to policymakers, it is a priority to reduce the share of FX denominated debt. The FX maturities of the second half of the year will be repaid by converting available HUF deposits. According to the Deputy CEO of GDMA it is also possible that the part of the FX debt assumed from local governments will be repaid before the end of the year. In order to achieve a declining FX share, retail HUF securities were issued in enormous amounts, debt outstanding increased to HUF 1,960 bn at the end of Q (see Chart 10), which is more than 7.9% of the total debt. The PEMÁK (floating interest rate domestic FX instrument) tries to substitute some part of the FX issuance (see Chart 11). At the end of June 2014, the total outstanding value was HUF 799 bn (EUR 2.6 bn). The amounts of PEMÁK transactions were negligible in the past few months. Chart 8: The evolution of the different central government debt structures (HUF bn) Chart 9: The evolution of the different central government debt instruments (as % of total debt) 4

5 Chart 10: HUF retail bonds evolution (HUF bn) Chart 11: FX domestic bonds evolution (HUF bn) Chart 12: HUF debt maturities (year) Chart 13: The owners structure of HUF bonds (%) Sources: NBH, OTP Research Foreigners share of the HUF portfolio was 33.1% at the end of Q (see Chart 13); it stagnated over the second quarter but was lower than at the end of 2013 (36.3%). The stock of financial corporates is on an increasing trend. We may expect a continuation of this trend as the National Bank of Hungary announced the socalled Self-Financing Plan, a programme intended to improve the structure of public debt, to decrease the interest expenditures of the public sector (government and NBH consolidated), and to cut back the size of the central bank s balance sheet, by stimulating the Hungarian banking sector to hold government bonds instead of twoweek MNB bills (for more details please see our research). The stock of the HUF bonds held by resident financial institutions grew by HUF 435 bn in Q2. At the same time, the stock held by non-residents increased by HUF 472 bn. The average maturity of HUF bonds increased recently as the bond series 2014/C matured in January (see Chart 12), the average maturity of HUF debt instruments is lower as the HUF instruments sold to households are typically short (1/2-1-2 year) instruments. Chart 14: The characteristics of HGBs held by foreign investors (HUF 1,000 bn, year, %) Chart 15: The main bondholders of the more-thanone-year HUF bonds (as % of total) Sources: NBH, OTP Research 5

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