Hungary still top in the region - in state debt

By bne IntelliNews July 23, 2015

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Hungary came second in the EU, behind only Greece, in terms of progress in reducing government debt in the first quarter, having cut its debt-to-GDP ratio by 4.7pp y/y, Eurostat data showed on July 22.  Latvia and Lithuania joined Greece in the top three for debt reduction on a quarterly basis.

The reductions put in context the low levels of debt in Central Europe and the Baltics. While at more than 77% of GDP Hungary's state debt dwarfs that of any of its regional bretheren, it looks moderate on a European level. Average state debt in the EU28 in the first quarter of 2015 grew to 88.2% from 86.9% a year previously.

The highest ratios at the end of the first quarter were recorded in Greece (168.8%), Italy (135.1%) and Portugal (129.6%). The lowest debt levels were in Estonia (10.5%), Luxembourg (21.6%) and Bulgaria (29.6%).

Hungary has struggled to reduce its debt in recent years. At the end of Q1, it came in at 77.6% of GDP. However, the progress depended less on trimming nominal debt than it did on the country's strong GDP growth and the forint‘s appreciation.

Hungary's economy expanded 3.6% in 2014. Meanwhile, the forint gained from HUF307.06/€ at the end of March last year to HUF299.14 by the end of the first quarter of 2015, notes Portfolio.hu. The analysts at the financial portal also suggest a base effect must have been in play; issuance in Q1 was probably stronger than usual, they point out.

By way of comparison, Slovakia quashed its ratio by 3.5pp on an annual basis to 54%, while the Czech debt-to-GDP ratio fell 2.2pp to 42.2%. In Visegrad, only Poland's burden increased, with the ratio swelling 2.3pp to 50.8% of GDP.

In quarterly terms, Hungary’s general government debt rose 0.7pp in the first three months of the year, likely owing to significant pre-financing at the beginning of the year and the replenishment of reserves. That rise, which keeps Hungary's debt ratio by far the highest amongst the EU's new member states, is regarded as posing a continued risk to the country's hopes to return to investment grade.

The Baltics joined Greece in leading debt reduction on a quarterly basis. The largest decreases in the EU were recorded in Greece (-8.3pp), Latvia (-5.1pp to 35%) and Lithuania (-2.7pp to 38.1%). Meanwhile, Estonia's miniscule ratio of 10.5% of GDP - the lowest level of state debt in the world - remained unchanged on both an annual and quarterly basis, despite the low borrowing costs available earlier this year to Eurozone countries.

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