BUDAPEST (Reuters) - Hungary is less vulnerable to a rise in U.S. interest rates than in the past, its economy minister told Reuters on Thursday, expressing hope that the forint would firm in the coming weeks.
Prime Minister Viktor Orban’s government has stabilized Hungary’s finances since it took power in 2010, using big windfall taxes on banks and other business sectors such as energy and telecoms, while economic growth is around 3 percent and Hungary also runs a big current account surplus.
However, due to the past five years’ go-it-alone and often unpredictable policies, which eroded investor confidence, Hungary’s debt, among the highest in Central Europe, is still rated “junk” by the three main rating agencies.
Most economists expect Hungary to return to investment grade next year as the government has softened its stance toward banks this year and eliminated a pile of toxic foreign currency debt burdening households.
An upgrade could also help Hungary weather the storm next year if the Fed continues tightening, Economy Minister Mihaly Varga told Reuters.
“Seemingly there is a strong, or mechanic link between the Fed’s rate rise and an increase in our debt market yields,” Varga said in an interview on Thursday.
“But in my view this is not necessarily so, because if yields diverge in emerging market countries then Hungary does not necessarily have to worry about its yields rising by a degree that would be justified by the Fed’s rate change.”
He said investors could start to differentiate among emerging markets, such as Turkey, Brazil or Poland, with Hungary possibly also benefiting from a potential upgrade into investment category by a credit rating agency next year.
Varga said such a move could also push down Hungarian yields.
He also expressed hope that the forint could firm in the remainder of the year, as levels around 308 or 310 versus the euro “would be better” for a reduction in Hungary’s debt level than the current exchange rate of 315. More than a third of Hungary’s public debt is still in foreign currency.
Varga said there was a good chance this year for state debt to decline from last year’s 76.2 percent of economic output.
He said the government planned a further reduction in the budget deficit to 1.7 percent of GDP in 2017 and 1.6 percent in 2018, from less than 2.4 percent this year.
Varga said it was “very important” that Hungary should issue a renminbi-denominated bond next year under a deal signed with China in November.
The upper limit of this issue could be 3 billion yuan ($462.81 million), Varga said, adding that Hungary would decide later next year whether it would tap international markets in other currencies as well or refinance expiring debt from domestic issuance.
“We’ll see around the end of February how yields perform, whether debt agency AKK should continue to be active in the domestic market or go out again (to international markets).”
The minister also said the government would most probably sell both MKB Bank and Budapest Bank next year, with MKB to be privatised already in the first quarter.
“An important aspect is ... that domestic investors should get a chance (in the privatization of these banks),” he said, adding that the proportion of Hungarian ownership within the bank sector, currently close to 60 percent of balance sheet total, should not decrease.
Editing by Jeremy Gaunt