Repayment to start at year-end for half of municipal bonds

Repayment is to start at the end of 2011 for about half of Hungary's HUF 550bn in municipal bonds, according to a study of the National Bank of Hungary analyzing the risks of the indebtedness of the municipal sector.

Repayment could start on 90% of municipal bonds by the end of 2013, the analysis said.

The percentage of bonds with repayments overdue for more than 90 days was 3%, or HUF 16.5bn in bonds, in the middle of this year.

Municipalities' indebtedness to the banking sector has doubled in 2007-2008, and the stock of municipal bonds reached HUF 550bn and the stock of loans HUF 450bn at the end of June 2011, the study said. Foreign-currency exposure is around 60% within the stock of loans and bonds, 80% of which is Swiss franc exposure.

The municipalities' financial position is determined by the fact that while their deposits declined almost HUF 220bn, accumulation-related expenditures grew to HUF 721bn in 2010 from HUF 574bn in 2009, presumably due to accumulation expenditures related to EU tenders. Operating expenditures were also up around HUF 84bn yr/yr in 2010.

The study said the weakening of the forint to the Swiss franc also led to a deterioration of municipalities' net financial position. The sector's stock of liabilities to the banking sector grew around HUF 110bn compared to the first quarter of 2010 due to the exchange-rate change, which highlights the substantial exchange-rate risk surrounding the portfolio.

The authors estimate that repayment will start for almost half of the municipal bonds by the end of 2011 and this ratio could reach 90% by the end of 2013.

Calculating with the exchange rate at the end of 2010, the repayment burden related to the total stock of long-term liabilities could exceed HUF 60bn in 2011 as principal repayment periods begin. This means that the HUF 8bn increase in the bond repayment burden plays a determining part in the HUF 10bn increase in the repayment burden compared with last year. Total repayment obligations could grow to HUF 80bn according to estimates based on municipalities' forward-looking statements. Thus, the repayment burden related to long-term liabilities will grow to 0.3% of GDP from 0.2% of GDP in 2010.

The study says the banks' municipal exposure cannot be considered problematic while risks are increasing, particularly the risks related to the stock of bonds. In the case of municipal loans, the ratio of non-performing loans was 1.2% at the end of H1 2011. The authors estimate that, within the stock of bonds, the ratio of repayments overdue for more than 90 days was almost 3% at the end of June 2011, that is HUF 16.5bn, up from 2.1% at the end of March 2011. Thus, within total municipal exposure, the ratio of non-performing loans has reached 2.1%, while the impairment coverage of this portfolio rose to 14%, which remains below the 40% coverage of the total banking NPL lending portfolio.

The restructuring of the entire sector can substantially influence the future position of the municipalities, the study says. As municipalities' basic responsibilities will be narrowed and key institutions will be assigned to the central government, it is also possible that while certain municipal duties are restructured (taken over), municipal debts would also be taken over by the state, which could create a clear picture. (This would be an amount of HUF 180bn.)

Such a move would not increase the government debt as the municipal sector's debt is already part of the government debt, the authors of the study said.