Markets baulk at Hungary's "good message"

By bne IntelliNews July 31, 2013

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Hungary's plan to pay off the International Monetary Fund early sends a "good message" about the economy to the world, the ruling Fidesz party claimed on July 30. However, the markets appear to have a different perspective.

Hungary's economy ministry announced the previous day that it is set to pay off €2.2bn outstanding from the country's HUF20bn bailout by the IMF by August 12. Fidesz spokeswoman Gabriella Selmeczi told reporters on July 30 that the move will enhance trust in Hungary, and that once the loan has been repaid, Hungary will no longer have to save for the installments and will have broader scope for manoeuvre, according to Bloomberg.

However, it seems fairly evident that the government is less interested in the views of "the world" or the markets than the domestic audience, and it looks part of a populist campaign that Prime Minister Viktor Orban's government has started ahead of elections next May. Fidesz is trying to tap into the crisis-led anti-EU sentiment amongst the population, by claiming it is fighting for freedom from encroachment on its sovereignty from international institutions, in a bid to maintain its constitutional majority in parliament.

Illustrating that priority, Selmeczi flagged up the fact that it was the previous Socialist-led government that took out the 2008 loan from the IMF. She called the bailout "the price of the extremist economic policies pursued by the governments of Ferenc Gyurcsany and Gordon Bajnai" - Orban's Socialist predecessors.

Coming on top of plans to cut energy tariffs by as much as 30%, and new plans for legislation to convert the huge volume of foreign currency mortgages into forint debt. the IMF move has seen the markets pull back and the forint drop to new lows against the euro.

Return of nerves

As Tim Ash at Standard Bank notes, despite Budapest having ruled out the most extreme solutions to the forex debt issue - which would have hit banks for huge losses and further dampened already collapsed lending markets - it is the return of Fidesz' erratic "unorthodox" policymaking that is scaring investors. The government's pretence through most of 2012 that it was chasing a new loan from the IMF helped keep the markets reasonably steady, but they are now looking nervous.

Since the plan to reopen the forex mortgage issue was announced on July 16, shares in Hungary's biggest bank, OTP, have fallen by roughly 17%, wiping about HUF200bn off its

market capitalization, points out Reuters. The bank took another hit when its chairman and CEO sold a big chunk of shares. Meanwhile, yields have moved out and the forint has been bubbling just under the threshold of 300 to the euro.

"Hungarian markets have been weak over the past week, reflective of the double whammy from the announcement of yet more efforts to resolve the FX loan problem and the early repayment of the IMF loans," Ash writes in a note.

He points out that the downturn comes despite the improved sentiment mouthed by the banks recently. "Actually, news flow on the FX loan front has been more encouraging," he points out, "as noted by comments by an Austrian Bank CEO today indicating his sense that the government is more willing to work with the banks to resolve a common problem."

"There could be a bit of a reduction of our pain in Hungary," Andreas Treichl, CEO of Erste, told investors on a call after the bank reported second-quarter results, reports Reuters. "There seems to be more awareness now that the government actually needs the banks to fuel economic growth, and I'm absolutely convinced that the Hungarian government wants to see economic growth."

"It does thus seem to be the IMF loan repayment which is causing market flux/concern," Ash continues, "and herein the last comments from the Fidesz official are perhaps most worrying, i.e. this idea that paying back the fund early gives the government more room for manoeuvre. It is precisely this "room for manoeuvre" that the market is fearful of given the track record over the past couple of years for surprises, and unorthodoxy."

"I guess unorthodoxy is ok these days," the analyst concludes, "given the global context, but it's the policy surprises, which the market does not like much. Experience has been that too often in Hungary policy surprises have meant half-baked policy impulses."

Eating the buffer

Although noting that the €2.2bn was meant to be repaid to the fund over the second half of 2013 and 2014 anyway," Ash warns it "is still a big chunk of the government's fiscal buffer. Data from the [National Bank of Hungary] suggests that as of the end of June, the government had $4.76bn in FX on account at the [National Bank of Hungary] and in the country's banks with a further HUF640bn ($2.8bn) in HUF in the NBH and local banks. Net-net this eats away at around one third of the government's cash buffer."

At the same time, it sees the government effectively forcing the country to pay hard cash in support of its campaign for next year's parliamentary election. After close to two years out of international markets, Budapest issued $3.25bn via a dollar-denominated, 10-year bond in February. The early repayment to the IMF will bring further issues closer, and although Hungarian yields have held up reasonably well in the recent pullback in emerging market bonds, they are still far higher than the costs tied to an international institution such as the IMF.

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