Hungarian debt chief sees ‘soft landing’ with central bank cut

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Hungarian debt chief expects a ‘soft landing’ for the local bond market as the central bank cuts its asset purchase program, which is part of one of the monetary tightening campaigns most aggressive in the European Union.

The central bank cut its weekly bond purchase target to 40 billion forints ($ 131 million) from 50 billion forints last week, the second reduction of 10 billion forints in as many months. He plans to maintain the current buying target until a review in December.

“We should be able to achieve this with a soft landing, without too much turmoil,” Debt Management Agency chief executive Zoltan Kurali said on Friday. “The amount is absolutely correct.”

A “decisive withdrawal” from the central bank’s quantitative easing program would risk causing a selloff in Hungarian bonds, while the cut could nonetheless continue to drive up yields, UniCredit SpA economist Dan Bucsa said, in a September 16 research note. The yield on Hungarian 10-year forint bonds hovered around 3.17% on Monday, close to the highest since May.

The government plans to increase sales of forint-denominated floats due 2029, having already sold over 1,000 billion forints of similar notes due 2027, said Kurali, a former executive at Deutsche Bank AG. Floats are not part of the range of securities purchased by the central bank.

With domestic yields rising, Hungary unexpectedly revised its funding plan for this year to sell $ 4.25 billion in dollar-denominated bonds as well as € 1 billion ($ 1.17 billion) tickets two weeks ago.

The money is in part aimed at closing a funding gap resulting from the European Union executive’s decision to delay approval of the country’s pandemic stimulus funds due to rule of law issues. About 1,000 billion forints equivalent, or $ 3.3 billion, can be used to pre-finance next year’s spending, Kurali said.

Moody’s upgrade

Moody’s Investors Service cited the review of the funding plan as a factor in improving Hungary’s sovereign rating to “Baa2”, the second lowest investment rating.

By advancing a big debt problem to this year, as Hungary posts record economic growth as the country recovers from the coronavirus pandemic, the plan could help put the government debt-to-gross domestic product ratio on a declining path. until 2023, Moody’s said in a statement Friday night.

Hungary is still considering issuing Panda Green Bonds, or yuan-denominated notes issued by foreign entities in the local Chinese market. The show, if continued, could be in the range of 1 billion to 2 billion yuan ($ 155 million to $ 309 million), Kurali said.

The bond selling efforts in Asia reflect Hungary’s strategy to maintain closer ties with the Chinese economy. Hungary sold 2 billion yuan of three-year Panda bonds in 2018 after a pilot issue of 1 billion yuan the previous year. In 2016, it sold debt in China’s offshore Dim Sum market, the first in Chinese currency from an Eastern European country.

Even with the recent increase in foreign issuance, Hungary intends to keep its foreign currency share of its public debt in the 10-20% range.

“I don’t expect our strategy to change in a way that would cause us to consistently exceed the 20% limit,” Kurali said.

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