Hungary’s conversion of foreign currency mortgages to forints at market rates was perfectly timed. But it is not the only evidence of the country’s achievements in mitigating its external vulnerabilities. Improvements in tax collection and public debt management are also impressive
Hungary’s economic and financial position has come a long way over the past three years. That is partly thanks to Mihaly Varga, minister for national economy (the equivalent of the finance ministry) since 2013. Previously minister overseeing multilateral financial relations, Varga oversaw the lead-up to Hungary’s early repayment of its IMF debt in 2013.
In European terms, Hungary’s GDP growth (about 3.6% last year according to the IMF) is impressive. The economy is expected to slow over the next three years but the IMF still expects growth above 2%. While investment and consumption has risen, inflation has fallen. Private sector jobs are proliferating. Services and manufacturing exports are helping a current account surplus of more than 4%. Banks’ dependence on parent funding has declined.
It is all in stark contrast to Hungary’s post-2008 situation. Indeed, it is notable that in May, Fitch placed Hungary’s BB+ rating on a positive outlook — a rare event in this region — as Fitch’s regional sovereign analyst, Ed Parker, notes.
This is not to say fiscal measures under Prime Minister Viktor Orban, such as extraordinary tax measures on banks, telecoms firms, energy companies and retailers, were not controversial. It will be encouraging for investors to see some of this reversed. Less orthodox moves under Orban, including at the central bank, have created doubt and uncertainty.
But Hungary acted on its vulnerabilities and the benefits can be seen. Debt to GDP, though still high at 77%, is falling, with the deficit below 3% in each of the past three years. “Hungary has come out quite strongly in macro-economic terms in the past two years; it has surpassed the market’s expectations,” says Pasquale Diana, head of CEEMEA economics at Morgan Stanley.
Perhaps Varga’s star policy was to allow the conversion of some $12bn in foreign currency mortgages, mostly Swiss francs, to forints in November last year. The large portion of household foreign exchange debt had been a weight dragging down the economy and householders — one that would have been worse when Switzerland unpegged its currency from the euro.
“It was an outstanding achievement — especially coming before the revaluation of the Swiss franc in January,” says Michael Marrese, a senior sovereign strategist at JP Morgan.
The conversion of foreign currency mortgages was not Varga’s only advance. Another scheme that Diana mentions brought direct online connection of cashiers to the tax registry, improving VAT revenues due to better compliance. Others praise the VAT scheme too, including Zoltan Arokszallasi, chief macro and fixed income analyst for central and eastern Europe at Erste in Vienna. He says the government has further improved revenue by introducing a priori registering for cross-border transporters.
“Tax evasion and the black economy is still a problem in Hungary, but these steps seem to be yielding results,” says Arokszallasi.
Meanwhile, Phoenix Kalen, emerging markets strategist at Société Générale, notes innovative work at the debt management office, central bank and finance ministry to reduce the proportion of debt held by foreigners. She points to the launch of euro denominated retail bonds, for example, and new incentives for banks to hold local securities.
Kalen says there has been a steep decline in the proportion of non-resident holdings of Hungarian government securities over the past three years, with the figure falling from more than 40% to less than 30%. “Reducing this exposure was particularly important given US rates are rising, which will impact appetite for emerging markets,” says Hulea.
SHIFTING THE BURDEN
Finance minister Mihály Varga says the recent China crash shows Hungary’s resilience, as US rates begin to rise. “Hungarian markets remained tranquil, unlike the broader emerging market group,” he says of events in August. European and Hungarian monetary policy, fiscal consolidation, a trade surplus and a reduction in non-residents and foreign currency in public debt are all reasons to think this will continue, in his view.
Varga says the conversion of foreign currency mortgages improves Hungary’s stability, with around half a million mortgages being converted. A Supreme Court ruling that borrowers assumed the currency risk meant it had to be at market rates, but he says a new banking act strengthens consumer protection, including rules on data provision before signing contracts.
“The primary objective of the conversion — by sustaining banking sector stability — is to eliminate for once and forever future currency risks that consumers would have to bear,” says the minister.
He says the conversion, the new bank law and strong economic growth are set to see the government reduce special taxes on the banking sector, which he describes as “fair social burden sharing” during the post-crisis economic adjustment. “The government is determined not only to keep the fiscal deficit at a low level but also to gradually reduce general government debt,” he says.
Online connection of cashiers to the tax authorities and similar tax measures on transporters are helping, with VAT revenues rising 7% in the year to August. “These highly favourable revenue trends have been the result — in addition to the acceleration of Hungarian economic growth and the upturn in consumption — of government measures aimed at combatting the black economy and tax fraud,” says Varga