In his private life, Andras Rez likes nothing better than sitting at home in front of his computer, trying to emulate the acrobatic feats of Peter Besenyei, the Hungarian national sporting hero whose skills as a stunt pilot have won him world-wide acclaim. In his public role as general manager and head of planning, research and risk management at the AKK, the Hungarian debt management agency, Rez has had to pull out his own fair share of twists and turns in recent months to ensure that the country’s funding plans remains firmly on track.
A combination of political, economic and market upheaval last year led to a relatively turbulent ride for the AKK, which has long been regarded as the most professional of the debt management agencies in central and eastern Europe. Despite this, the AKK still achieved its E2.5 billion funding target for 2006. “Our experience is that the political backdrop has had very little effect on our funding activity,” says Rez, adding: “The financial markets can differentiate between political events and those events that surround our funding activities.”
While riots outside the Hungarian parliament in September hardly provided the best possible public relations for any funding team, Rez points out that Hungary was hardly alone in suffering from such upheaval in 2006, with rioters and burning cars as much a feature of the cityscape in Paris and Copenhagen as they were in Budapest.
“Investors realized that our debt funding strategy was stable,” says Rez, adding that potential buyers of Hungarian paper have always been familiar with the country’s financing plans, which are announced in advance before the start of each year.
“Investors know years ahead where and how we will fund ourselves,” says Rez, adding that 30% of the country’s funding comes from abroad, while the 70% balance is sourced domestically. Although the euro is Hungary’s prime international funding currency – accounting for at least half the country’s overseas borrowings – Rez says that Hungary will continue to issue in other currencies such as yen and sterling on an opportunistic basis. “It’s advantageous to have the choice of tapping different markets.”
Reductions
What’s more, in both 2006 and 2007 there have been net reductions in the country’s international debt issuance needs, with the target slashed from E3.5 billion in 2005 to E2.5 billion in 2006 and a relatively paltry E2 billion in 2007. “Investors realize the net overseas funding need is declining,” says Rez.
As a result, the AKK was still able to raise E500 million in late September at the height of the political storms that buffeted the country last year. “It was very important to have a good, smooth transaction,” says Rez, adding: “The riots did not have a negative effect on the government’s ability to raise money internationally.”
BNP Paribas and Dresdner Kleinwort priced the tap of the country’s November 2012 floating-rate bond after a second night of rioting in which dozens were injured.
Despite the civil unrest on the streets of Budapest following the revelations in the local media that prime minister Ferenc Gyurcsany had misled the Hungarian public about the state of the country’s economy, the lead managers were still able to pitch the deal in the middle of the 24bp-26bp over Euribor price guidance. “Investors are interested in the country’s finances, not the politics,” says Rez, adding that buyers of Hungarian debt will ultimately judge the current government on its ability to deliver on promised economic reforms, most notably slashing the country’s double-digit budget deficit.
“It’s important that the government gets the budget deficit down from 10% at the end of 2006 to a planned figure of 6% at the end of this year,” says Rez. He adds that, if it succeeds, there should be a reversal in the spread widening seen on the country’s international debt last year. From a low of 20bp over Bunds in 2005, the spread on Hungary’s euro-denominated bonds ballooned out to 30bp over in 2006.
“As both the budget deficit and funding requirement decline, we expect to see our spreads tighten,” says Rez, adding that he is also looking to see a revival in the country’s creditworthiness, which has deteriorated in the last 18 months. In December, Moody’s Investors Service downgraded Hungary to A2 from A1, while both Standard & Poor’s and Fitch Ratings had previously downgraded it from A- to BBB+.
“The ratings backdrop has been unfavourable recently, but we would expect upgrades in the next couple of years,” says Rez. Looking ahead, he believes Hungary will enjoy a successful funding year in 2007 on the back of improving investor sentiment and increased political stability. “We’re seeing huge demand from investors, both domestically and internationally.”