Nomura: Hungary eyes cosmetic cuts in debts

MNB

The government and the Hungarian National Bank (MNB) are cooperating to achieve aggressive, cosmetic, reductions in debt-to-GDP ratio at year's end via a range of cash management, repo, temporary transfer of ownership, buy back and foreign exchange policy moves, Japanese financial holding company Nomura said in a report yesterday.

While there was no surprise from the MNB as it held the base lending rate steady yesterday, policy regarding foreign exchange loans, including the law passed yesterday, are likely to impact rates in the coming months, Nomura said.

The MNB's rate setters yesterday explained that rates needed to remain unchanged, as they saw medium-run inflation returning to target with the current loose monetary policy, and that cautious monetary policy was needed given the external backdrop and risk premia concerns around Hungary.

Nomura analysts said they believe that rates are currently in a holding pattern, awaiting more interesting developments with regard to foreign exchange and efforts by the government to improve the appearance of its debt situation.

At the end of October, debt to GDP ratio rose to 83.4% of rolling GDP but importantly around 82.6% of full-year projected nominal GDP. According to Nomura, the Hungarian government earlier expressed the urge to achieve a ratio of 77.0% at year-end while a softer target is to get debt below last year’s print of 79.3%. Nomura analysts believe that to reach the 77.0% target, an exchange rate of euro to forint would  need to be fixed "at an unrealistic 277.3", which "suggests a significant amount of manipulation".

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