Bringing Hungary's state debt under the cap in the new Constitution would require higher than expected economic growth, lower financing costs or additional measures to improve the fiscal balance equivalent to 0.4% of GDP from 2015 on, the National Bank of Hungary said in a regular review of public finance published on Friday.
The MNB projects gross state debt as a percentage of GDP may decline from 79% at the end of 2012 to around 66% by 2027. Hungary's Constitution contains a 50%-of-GDP limit on state debt. The central bank stressed that the debt trajectory "bears close resemblance" to a projection published by the European Commission last autumn. The MNB projection shows state debt rising on an annual basis in 2015-2017. The central bank attributed the increase in the debt path compared to its projection in May 2012 to a smaller primary fiscal surplus and "less favourable" growth prospects. It added that "persistently lower funding costs" compared to the earlier assumptions moderate the increase of the debt rate.
The MNB sees the primary fiscal balance, which excludes debt-servicing costs, falling from 1.3% of GDP in 2013 to 0.3% by 2016-2017, then gradually increasing to 2.1% by the end of the 15-year projection horizon. It attributed the temporary fall in the surplus to a new remuneration scheme for teachers, the reimbursement of losses made by the central bank and a drop in EU funding. It added that the increase in the primary surplus would be supported by the "expected persistent contribution" of the profit of the MNB to fiscal revenue from 2018 on. Although pension expenditure on the short term is bigger than thought last May, it is forecast to drop by 2.7%-points of GDP to about 9% of GDP in 2027 thanks to reform measures taken, and its dropping share is an important factor in the projected improvement of the fiscal balance, and, consequently, of the debt ratio. A conversion to inflation-indexation from Swiss indexation alone explained 1%-point of the drop, Antal Judit of MNB told analysts on Friday.
She noted that the starting debt position was significantly affected by a takeover of private pension funds' assets portfolio by the state (mostly in 2011 and to a lesser extent in 2012). The assets takeover alone reduced the state debt ratio by 7.7 percentage points of 2012 GDP. Within the total reduction, the direct withdrawal of government securities received as part of the portfolio reduced the debt ratio by a factor of 4.9% of GDP, debt redemption and repurchase reduced it by 1.2%-points and the remaining 1.6%-point was the part of the assets taken over which were calculated among budget revenues in 2011. About 2%-of-GDP worth of the former private pension fund assets were still with the government at the end of 2012, and the MNB experts assumed they would be sold in the next two years.
The MNB said it expected Hungary's sovereign risk premium to "decline considerably" in the medium term, but added that it would not return to pre-crisis levels over the projection horizon. It put the real interest rate on forint government securities slightly over 3%, implying the average real costs of financing all debt, including that denominated in foreign currency, will stabilise at pre-crisis levels.
The MNB expects the gap between actual and potential GDP to close in 2016, with potential GDP growth increasing gradually to 2.5% per year from the end of the current decade.
The MNB noted that its analysis does not contain a "forecast" but a "technical projection". "Instead of the most likely path that takes into account the likely responses of economic policy, we present the deficit and debt trajectories assuming no change in current economic policies," it explained.
To highlight the potential effects of changes to assumptions on outcomes in the projections, the MNB included the results of a sensitivity analysis in the review. It shows a 0.5% divergence from the baseline growth rate starting in 2015 resulting in a 5 percentage point change in the debt ratio at the end of the projection horizon. A 10% change in the exchange rate in 2015-2027 would move the debt level 2.6 percentage points, a 1 percentage point shift in yields on government securities would move the ratio by 7 percentage points, and a 0.5 percentage point difference in the primary balance would affect a 6.8 percentage point change in the debt ratio.