Hungary: Low bond supply thanks to diversification

The government forecasts that the budget deficit last year was 5.9% of GDP, higher than the original target of 3.9%, which was later revised to 5.2%. For this year the government is projecting a deficit of 2.9% of GDP, which is the assumption for the debt agency's (AKK) funding plan for this year. However, the budget plan hinges heavily on a recovery in domestic consumption without which it will suffer further. We thus expect a deficit of 4.4% of GDP for this year.

Despite a higher deficit than projected in the AKK plan, low redemptions and diversification of funding paints a favourable picture for HGBs this year. We expect gross borrowing needs to fall this year from HUF12,839bn to HUF10,639bn (-17% year-on-year). This is a result of both a lower government budget deficit and redemptions. As the focus remains on retail bond issuance, HGBs offer a nice picture despite the fiscal risk. Gross HGB issuance is expected to fall from HUF3,349bn to HUF2,472bn (-26%) this year. Moreover, despite total redemptions being lower this year than last, HGB redemptions are actually higher year-on-year, leading us to see a net HGB supply drop of 72%. As usual in the Hungarian case, supply should be roughly evenly spread among maturity baskets. It is clear from the breakdown that HGBs will offer a buffer this year in the case of a higher state budget deficit, however, we believe the AKK's focus will remain on retail and potentially FX issuance, which should leave HGBs protected from a potential increase in supply later.

On the FX issuance side, AKK has front-loaded the supply this year with two issues of USD2.5bn and EUR1.5bn (green bond) in January, which essentially covers AKK's target for this year (EUR3.8bn). However, the agency has indicated it may issue a Samurai (JPY) or Panda (CNY) bond in the second half of the year, depending on market conditions. This would effectively reduce issuance elsewhere in the plan if fiscal policy remains under control. We budget for EUR4.6bn in FX bond issuance over the year.

In the context of Hungary’s typical Eurobond (FX) issuance, this year’s plan (already covered) sees slightly lower gross issuance, compared to $6bn annually on average in the post-Covid era. Given the successful front-loading, this would appear to offer plenty of flexibility for increasing supply later in the year, whether on the back of fiscal slippage, continued EU disbursement uncertainty, or simply pre-financing for 2025. While Hungary has been more active on the international market than pre-Covid – there was almost no gross issuance from 2014-2019 – from this year onwards it looks set to be quieter than CEE peers Romania and Poland. In terms of currency, the nation is likely to continue its preference for USD, while being one of the more active issuers in JPY and CNY, along with its focus on green bonds. This highlights the overall strategy of maximum diversification of funding sources.