Hungary could celebrate an upgrade from Moody’s later this week with a return to international markets, the economy minister hinted on November 2. A Eurobond issue could follow within weeks.
Moody’s is widely expected on November 4 to follow in the steps of Fitch and S&P, which both upgraded the sovereign earlier this year after around five years in "junk". The government said in September, as the second investment grade - required by most institutional investors - was delivered by S&P, that it created an "entirely new possibility for the Hungarian state".
Prime Minister Viktor Orban asked Economy Minister Mihaly Varga to make an assessment of the consequences of the upgrade, and to propose changes to the country's debt management strategy. While the minister said this week that a rapid issue following a Moody's upgrade is unlikely, Hungary could be tempted to tap the lower funding costs on international markets.
Hungary's last foray on international markets came in March 2014, as it raised $3bn through the sale of a dual-tranche US dollar bond. The final yield on the 10-year issue pushed to 5.57%; the yield on the last auction of forint-denominated 10-year bonds stood at 2.97%.
The reaction to the S&P upgrade, on top of ongoing unconventional monetary easing from the central bank, shows the benefits. Since mid-Septmber foreign investors have increased their allocations to local bonds by HUF200bn. By mid-October, the upgrade had triggered around a 10bp drop in yields in the 3-10-year segment of the yield curve, Gyorgy Barcza, CEO of state debt manager AKK pointed out.
The expected third investment grade by Moody’s is unlikely to change the picture significantly, Gintaras Shlizhyus at Raiffeisen Bank International tells bne IntelliNews. But it does reinforce the rating.
“The S&P decision already changed the average rating of Hungary. Moody’s review will merely be a technical event, which is unlikely to result in further tightening of spreads on Hungarian Eurobonds,” Shlizhyus forecasts.
Rating decisions “will not affect fundamentally” Hungary’s debt management strategy, Varga claimed at a press conference on November 2. As in recent years, Budapest will continue to refinance maturing foreign currency debt mainly from forint issues as part of a long-term bid to reduce the country's exeternal exposure.
That push has been central for the government since it took power in 2010, and is perhaps the key element in the upgrades. Budapest will not throw it out lightly with a rush to raise new foreign debt. At the same time, the government will not reveal details about planned changes to its strategy before the Moody’s review is published, Varga added.
Yet government officials have clearly suggested since the S&P upgrade that a return to international markets is on the cards. After a hiatus of close to two years, Hungary raised CNY1bn (€137mn) via the issue of a three-year dim sum bond earlier this year. Analysts suggest that now tapping markets with a Eurobond would make sense amid the current low yields.
That view is shared by Barcza, who claims there has been rising demand in the market for new Eurobond issuance. However, he suggests “it would be worth returning to the FX bond market [only] next year”.
“There will be €2bn-3bn worth of FX bond expiries in the following years. The FX ratio within public debt could decrease further even if this is partly refinanced from forint and partly from a new Eurobond issuance” Barcza told a press conference earlier this month, adding that "other global currencies may also be interesting for diversification reasons".
Shlizhyus points out, however, that now would be the time to strike, with the US Fed widely thought likely to raise rates late in the year. That will drain some demand for higher yielding debt such as Hungary's.
"I believe an FX issuance will happen before 2017, for pragmatic reasons. Interest rates are likely to stay lower before the end of the year, thus the Eurobond market would offer very low costs of funding now," the RBI analyst notes. "From the beginning of next year, however, there is an uncertainty about how eastern markets will react to the upcoming Fed decision."
The government, however, claims it is still mulling its options. “After the [Moody's] review, we will think about how the "Hungarian story" can be presented to investors, possibly during a roadshow. It can be a roadshow without issuance, though,” Varga says.