Hungary’s cash-strapped government is leaning on state-owned companies to raise cash from international markets as growing fiscal scrutiny, the highest interest rates in the European Union and suspended funding from the bloc narrow financing options.
(Bloomberg) — Hungary’s cash-strapped government is leaning on state-owned companies to raise cash from international markets as growing fiscal scrutiny, the highest interest rates in the European Union and suspended funding from the bloc narrow financing options.
State firms have raised a record $3.1 billion in foreign-currency debt this year to help fund government programs from energy-price subsidies to low-cost corporate loans. Utility MVM Zrt. was the latest, selling $750 million of green bonds on Thursday.
Prime Minister Viktor Orban is struggling to overcome growing criticism over his government’s fiscal management — including missed targets and ad hoc spending — at a time when investor focus is returning to budget scrutiny after years of stimulus spending during the pandemic era.
An ongoing recession, the EU’s fastest inflation and the highest interest rates, along with more than $30 billion in suspended EU grants and loans have exacerbated Hungary’s woes and pushed the country toward boosting foreign-currency issuance.
The strategy to outsource a share of this to state companies allows Hungary to boost its finances without further undermining fiscal targets, at least for the time being. But it comes at a price as investors demand higher yields to buy company credit instead of sovereign bonds. Also, sooner or later the country may need to consolidate its public-sector debt, according to Unicredit SpA economist Dan Bucsa.
“Since quasi-sovereign debt ends up being guaranteed or even repaid by the state, it is often consolidated into public debt,” Bucsa said. “I wouldn’t be surprised if other Hungarian quasi-sovereign borrowers will be included in public debt, if they continue to borrow in size.”
Energy Subsidies
MVM’s dollar bonds due in 2028 traded at a yield of 7.73% on Friday, 208 basis points higher than comparable government notes. The company has been the leading paymaster for Hungary’s lavish household energy subsidy program, receiving a 516 billion forint ($1.5 billion) recapitalization from the state last year to fund losses on capped electricity and gas bills.
Hungarian development bank MFB Zrt. sold $1.15 billion of bonds in May to gain funds for the government’s subsidized loan plan for firms. Its debt is also currently categorized as off-budget by the European Union’s statistics agency.
However, Eurostat has told Hungary to consolidate debt by Hungary’s Export-Import Bank Zrt., which sold $1.25 billion in international bonds in April. The bank helped fund a $1.9 billion purchase of Vodafone Plc’s Hungarian business in January, part of Orban’s plans to create a national telecom champion.
Hungary prefers for state companies to tap international markets rather than to capitalize them from the budget as the latter would boost EU-calculated state debt levels, Economic Development Minister Marton Nagy told journalists on Thursday.
EU Pressure
The EU is pressuring member states who run afoul of its fiscal rules, after relaxing them during the pandemic. The European Commission plans to re-launch its excessive-deficit procedure — which includes tighter oversight of fiscal profligates and potential fines — next year.
Hungary needs to take action “urgently” to rein in budget imbalances, the European Commission said in a May 24 report. It criticized Orban’s cabinet for its practice of approving the budget already mid-year — and then resorting to ad hoc spending in case of outperformance or raising budget targets in case of misses.
On Thursday, the government unveiled tax hikes, including on bank deposit savings and the extension of windfall levies into next year, to plug budget holes and bring the deficit below 3% of GDP next year.
(Updates markets from paragraph seven.)
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