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Eximbank reclassification could hurt state debt ratio

The inclusion of Magyar Eximbank in Hungaryʼs general government balance could increase state debt as a proportion of GDP from 74% to around 76%, ING Bankʼs chief analyst Péter Virovácz said on public television Monday, as reported online by financial daily Világgazdaság.

Ratings agencies would certainly take note of a higher state debt ratio, which is already elevated compared to other countries in the region, Virovácz told state news channel M1.

A majority on the Committee on Monetary, Financial and Balance of Payments Statistics (CMFB), an independent advisory committee for the European Commission and European Central Bank, advised Hungary on July 13 to classify Eximbank in the general government sector rather than the private sector.

The committee said that Eximbank has “limited autonomy of decision in its main corporate policies, acting on behalf of the state for public policy purposes,” and “has the features of a captive financial institution controlled by government.”

The opinion was issued in response to a request from Hungaryʼs Central Statistical Office (KSH) and the National Bank of Hungary (MNB) for clarification of the statistical classification of Eximbank. This came after Eurostat, the EUʼs statistical office, expressed reservations about the way Hungary classifies Eximbank, claiming that the institution should be included within the state budget - a view now upheld by the CMFB.

Earlier, Világgazdaság noted that Eximbankʼs total liabilities without own equity totaled HUF 796 billion last year, meaning that, based on 2016 data, the institutionʼs inclusion in the state budget could result in a significant, 2.28 percentage-point increase in the state debt in proportion to GDP.

Virovácz observed that, depending on the recommendation of Eurostat as to which portion of Eximbankʼs activities were to be reclassified, Hungaryʼs state debt ratio could deteriorate by half, one or two percentage points.

As an advisory body, the opinions of the CMFB are not legally binding. Consequently, although the majority has sided with the view of Eurostat, the Hungarian authorities may choose to ignore the opinion and continue to refuse to include Eximbank within the state budget.

Eurostat could subsequently take a firmer stance, choosing to publish its own statistical data on Hungary instead of that calculated by the Hungarian government. The Hungarian side could potentially then turn to the Court of Justice of the European Union for resolution of the dispute.