Credit rating improvement is bound to increase macroeconomic stability



As the word spreads around the world about positive economic figures, Hungary’s government securities market can look forward to an increased level of interest.

Now that Hungary’s credit rating has been upgraded by both Fitch and Standard & Poor’s, analysts predict further macroeconomic stability.  S&P’s country report noted that state debt denominated in foreign currency is down, and that fact is coupled with steady growth. If the third major rating agency, Moody’s follows suit with an upgrade in November, Hungary’s economic reputation is bound to further improve.

Among the consequences of such developments is the expected influx of fresh foreign investments into the Hungarian government securities market. “No less than HUF 200 billion could flow in from abroad; however, it will not appear overnight, it will be a gradual process,” says Gergely Ürmössy, leading analyst at Erste Bank Investment. It is expected that it will be mostly long-term government securities that will be sought after by foreign entities, as short-term ones have already been bought by domestic players.

Another factor likely to fuel demand for government securities even further may stem from local commercial banks. They currently hold three-month National Bank of Hungary (MNB) deposits valued at HUF 1.6 trillion, but the total maximum amount allowed has now been capped by the central bank at HUF 900 million as from December 2016.

“This means that the difference of some HUF 700 mln must find new investment targets very soon. One obvious option is to buy government bonds, but not all resources will be devoted to that, since some of the money could land with other commercial banks on the interbank market, or the extra liquidity could find its new spot on the swap markets. What is more, the real economy could be a well-positioned target, in the form of lending,” Ürmössy adds.

Such soaring demand for government securities should push the already low MNB interest rates further down. According to Ürmössy, now that foreign portfolio managers are increasingly starting to consider buying more government securities, MNB interest rates are expected to remain low. Even if the global investor climate should deteriorate, they would go up more slowly in Hungary than in higher-risk countries.

Another immediate effect concerns the Hungarian currency, which has been showing unusual signs of strength. The forint – euro exchange rate moved from the realm of 316 in July all the way down to around 304 in mid-October. This strengthening course, however, is not to the liking of the MNB; it would certainly prefer a somewhat weaker exchange rate in order to reach its inflation target of 3%.

“Therefore, if the MNB finds the forint too strong, it is expected to use its full arsenal of tools to continue its policy of monetary easing,” says Frantisek Kovács, foreign currency market analyst at AKCENTA CZ.

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