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Good news on Hungary’s budget

Economics Minister Mihály Varga had some pleasantly surprising fiscal news to impart at year’s end: Higher-than-expected tax revenues and lower-than-expected deficit and public debt figures.

State Secretary Péter Benő Banai, left, and Economics Minister Mihály Varga, at the January 6 press conference about deficit figures. (Photo: kormany.hu)

Hungary closed 2015 with some good macro data: Just two days before the year ended, the National Bank of Hungary (MNB) published its seasonally adjusted figures of the Q3 budget balance, which showed that Hungary’s net financing requirement in the third quarter of last year was exactly zero.

That means the country did not rely on external sources to keep itself financed – something that has not been seen since such data was first recorded. In the 12 months to September 2015, Hungary’s net financing capacity was -0.6% of GDP, which is said to be the smallest figure since 1990.

It’s important to note that the MNB’s financing requirement statistics are not the same as the budget deficit calculated in line with the Maastricht criteria. Still, these figures projected that the country’s government deficit could be significantly lower than the targeted 2.4% of GDP – an analyst consensus at business portal portfolio.hu suggested that the headline deficit for 2015 would be even smaller than the earlier projected figure at between 1% and 2% of GDP. The site notes, however, that while shrinking the deficit is a laudable result of economic growth, it should be noted that without the sectoral taxes and the re-channeling of private pension funds to the state coffers, the deficit would be above 4% of GDP.

According to the National Economy Ministry, tax revenues exceeded expectations in 2015. At a press meeting at the end of last year, State Secretary for Public Finances Péter Benő Banai confirmed that, as a result of the higher tax revenues, the 2015 ESA deficit will be 2.4% or even lower.

After all this good news, Economy Minister Mihály Varga delivered even rosier figures at a press conference at the beginning of this year. He said that the budget situation had turned out to be more favorable than expected. He estimated economic growth at 2.8%-2.9% for 2015, and put the budget gap at around 2%, below the earlier target of 2.4%. According to Varga, Hungary’s debt-to-GDP ratio had also dropped to below 76% by the end of last year, down from the 76.2% recorded at the end of 2014.

Hungary posted a general government deficit of HUF 1.2186 trillion in 2015, according to preliminary data, the National Economy Ministry said in confirming what Varga had announced on January 6. Data also shows that tax revenues rose HUF 848 billion year-on-year, which is related to higher economic growth and the whitening of the economy, the ministry said.

Last-minute cash reduction

However, at the end of the third quarter of 2015, Hungary’s debt-to-GDP ratio stood at 78%, which indicated that approximately two percentage points of reduction was necessary by the end of last year (in an effort to meet the debt rule which stipulates that the debt-to-GDP ratio must fall from one year to another). In order to fulfill this requirement, the government decreased its deposits at the MNB in December, so the cabinet’s ready cash dropped to below HUF 660 bln, which is significantly lower than the amount at the end of 2014 and marks a seven-year low.

Portfolio.hu lists a number of possible ways the government could have lowered the ready cash stock, among them the central bank buying back a significant amount of forex bonds on the secondary market, and such a repurchase was made by the Government Debt Management Agency (ÁKK) in December, which also reduced public debt. But the year-end depletion of the ready cash stock could become problematic, as a lot more foreign currency debt will come due in 2016 than last year, and most of the maturities will be in the first half, between March and May. The ÁKK plans to finance these from forint issuances, and the economy minister also announced recently that Hungary would offer a Eurobond in January or February; if that happens, it would be the first time the country has sold bonds on the international markets in almost two years.

Hungary will submit its ESA report to the European Union at the end of March; it will contain the final details on the country’s debt and budget.