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China jitters called minor threat here

While there have been concerns about emerging market investment, Hungary is not likely to be heavily impacted, analysts say.

The fears about slowing growth in China seem to be abating somewhat, and by the beginning of September a semblance of order began returning to many world markets. But the going wisdom was that the emerging markets, a category that includes Hungary, were in a dubious position.

Local analysts told the Budapest Business Journal that they were not concerned, as the emerging markets that are in danger are those like Brazil, which has flourished by selling oil and other natural resources to meet China’s seemingly bottomless demand. Barring further external shocks, Hungary should weather the storm well, they said.

“The CEE region, including Hungary, can be thought of as a ‘safe haven’ among emerging market countries,” said Gergely Ürmössy, chief economist at Erste Bank Hungary.

Nonetheless, the most important opinion is probably that of Franklin-Templeton, the emerging market fund that has traditionally purchased a lot of Hungary’s bonds. Not surprisingly, it only made general remarks and would not discuss this specific market, but there are reasons to be optimistic about what that mutual fund will do.

Franklin-Templeton and other mutual funds that buy bonds have become especially important since the financial crisis of 2008. From that time the banks, which tend to be more heavily invested in their host countries and slower to leave, have reduced their role in emerging markets. Flexible bond funds like Franklin-Templeton now buy more of the debt in these markets, which is fine when all goes well. But if all investors suddenly lost faith and decided to cash out their shares at the same time, as happened to some banks in 2008, the mutual funds would be forced to sell, driving down the value of state bonds and making it harder for governments to sell more new debt.

Foreign firms pulling out already

Asked what their ultimate plans are for Hungary, Franklin-Templeton’s Szabolcs Ercsey, sales manager for Hungary, referred our reporter to a general statement by the global firm, which says in part, “In light of the concerns about China, as well as potential rising interest rates in the United States, investor fears regarding emerging markets have resurfaced, although we believe that certain countries have been indiscriminately punished.”

The statement explains that the economies that are most at risk are those dependent on selling their exports to China. While China is one of the biggest importers to Hungary, it is not even among the top ten markets when it comes to buying from this country. Germany buys roughly a quarter of Hungary’s goods, with other countries playing a lesser role.

As Gergely Pállfy, an analyst at Raiffeisen notes, Franklin-Templeton and other foreign funds have already been selling their holdings of Hungarian debt for some time.

“The number of bonds owned by foreign investors is on the decline,” he said, noting that in August it was listed at only HUF 4.134 trillion, “which is a low point in the past three years”.

Back in May, the head of Hungary’s Government Debt Management Agency announced on television that, in the first quarter of this year, Franklin-Templeton had sold roughly 20% of its Hungarian bonds.

“The reason for such a tendency cannot directly be the slowing of the Chinese economy,” Pállfy said.

According to analysts, more of the debt is being held by Hungarians, which brings a measure of stability.

“Non-resident investors are mainly present on the long-end of the yield curve, mostly over the ten-year maturity level,” Ürmössy noted. He added that the big foreign funds mostly seem to be holding on to their long-term debt and are simply letting short-term debt expire without reinvesting.

This sentiment was echoed by Erste Hungary analyst András Nagy, who said: “We are not expecting a sales wave to happen, but we believe that the number of Hungarian bonds owned by foreigners will decrease as the upcoming expired bonds will not be renewed.”

In fact, the analysts said, barring more major shocks to the worldwide economy, there are reasons to be upbeat about Hungary’s economy.

“The probability of a credit rating upgrade back to investment grade is quite high. We expect such an upgrade sometime earliest in 1Q16 which may also help the domestic bond market to become more resilient against external shocks,” Ürmössy said.