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Hungary debt reduction cheers investors

Hungary appears to be regaining trust from foreign investors, who took a note of the government's determination to manage the debt and cut state expenditures, The Financial Times reports. However, some observers remain skeptical whether the government will follow through with its "ambitious" plans,

The past six months have shown positive developments for Hungary in managing its debt. Foreign investors, noting the government’s determination to curb state expenditures and rein in debt, have piled into local bonds to hold what are now record levels – HUF 3,600 billion (€13.7 billion) – more than one third of the total amount, reports Financial Times.

“It’s been an outstanding performance,” with US dollar investors making over 20% annualized gains on medium and long term bonds from a combination of higher prices and exchange rate movements, said Istvan Horvath, macro analyst with UniCredit Bank in Budapest.

Observers, however, wonder whether these positive tendencies are going to last. The move to nationalize mandatory private pensions that reduced the debt level from 80% to 76-77% of GDP is simply buying some time.

More fundamental, says The Financial Times, is the economic program; an austerity package that emphasizes curbing government expenditures and upping economic expansion. Adam Keszeg, macro analyst with Raiffeisen Bank in Budapest, points out that the goals are “very ambitious.”

Cuts will be made in administration costs, and state subsidies for pharmaceuticals and transport. In addition to reduced unemployment benefits, there will be a drive to create 400,000 jobs by 2015 and raise the employment participation rate to at least 66% – all of which will underpin a steady rise in economic growth of up to 5.5% by mid-decade. These actions will result in a budget deficit averaging around 2.5% in the next three years.

Furthermore, the government, in its bid to curb the high rates of early retirement in Hungary for the police, prison and fire service workers, has upset several formerly compliant trade unions. Although the government’s resolve appears unshaken, protests, like those in June, inevitably raise fears that plans may be watered down.

Despite all of that and at least for now, foreign investors seem confident that the government will largely follow through on its promises, and as Horvath notes, sentiment has been further strengthened by Fitch’s recent tweak to its ratings, moving Hungary’s outlook to stable from negative, and China’s pledge last month to buy into Magyar state debt. He expects a “period of consolidation” for the market. He also appears to believe the government can at least partially deliver on its economic program – but admits that “the key will be how the structural reforms proceed.”

Keszeg foresees the immediate future to be relatively calm, though he expects sentiment to remain firm. “With the financial crisis in Greece [seemingly] avoided, we expect yields to come down from the present 7.2% to below 7%, but nothing like the last six months.”