By Krisztina Than (Reuters)
Hungary has lined up potential IMF help because its large external debt makes it highly vulnerable to global market shocks, but its problems are not comparable to Iceland whose economy has come close to collapse.
Unlike Iceland, where policy-makers are struggling to get the banking system functioning again, Hungary has a stable banking system, most of it in foreign hands, and its membership of the European Union also offers investors some reassurance.
However, Hungary built up a big debt burden before starting to slash its budget deficit in 2006 and while its debt levels should not rise further, the global credit crunch could make it harder to refinance its existing commitments.
"Tighter credit conditions globally pose a risk to Hungary, both from a public and private sector perspective," said Gillian Edgeworth at Deutsche Bank in London.
The Hungarian government has in the past relied on external financing to help fund its deficit, while much of the private sector credit growth has also been funded externally.
"In stark contrast with Iceland, Hungary's banking sector enjoys the cushion of large scale foreign ownership and recent government packages announced for the banking sectors within the euro zone should have a positive knock on effect on Hungary," Edgeworth added.
Nonetheless, financing Hungary's debt may be more difficult now when global risk aversion is acute and liquidity in the domestic bond market has dried up.
"When international banking resources are squeezed, the most vulnerable countries are those which have a high refinancing need," said Gyorgy Barcza, economist at K&H Bank in Budapest.
Hungary's government realised this and called the International Monetary Fund (IMF) last week to help restore confidence in falling markets. The IMF said it was ready to offer financial and technical assistance to Hungary if needed.
Hungary said it would use it only a last resort.
While the country remains at risk due to its large external debt, its budget deficit and inflation are falling.
Hungary's 5-year credit default swaps (CDSs) — a key indicator of risk levels — dropped since last week to 330 basis points, showing the country's debt is perceived as higher-risk than fellow EU-member Poland's levels at 120, but well below Romania's 500 and CDS levels of above 400 for the three Baltic states and Bulgaria.
DEBT FINANCING, FX RISK
By Tuesday the forint rebounded to 249.88 versus the euro, up sharply from Friday's two-year low of 272, but bond yields remained well above pre-crisis levels and liquidity was poor, indicating that investors' confidence has not returned.
Hungary had been the European Union's worst budget offender until 2006 when the government finally decided to tackle the huge deficit and despite the recent fiscal cuts, the credibility of economic policy has not been fully restored.
According to recent central bank figures the gross external debt of the Hungarian state and companies amounted to 89.9 billion euros or 93.8 percent of gross domestic product in the second quarter of 2008, while net debt was 46.3 percent.
"In the past two years our fundamentals improved considerably but markets still remember the times prior to 2006 and in this sentiment we are often put in the same category as (the Baltics and Iceland)," said Mariann Trippon at CIB.
Hungary's annual headline inflation slowed to a two-year low of 5.7 percent in September and the government has said it would cut deficit targets for both this year and next, with the deficit falling to 2.9 percent of GDP next year.
"The broader question clearly remains, however, the extent to which Hungary can roll its large gross external financing needs," said Gyula Toth at Unicredit.
Hungary relies on foreign investors buying its bonds to finance its deficits, and the central bank forecasts the current account deficit at 5.3 billion euros this year or 4.9 percent of GDP. The deficit is seen rising in 2009 due to a widening trade gap as exports slow along with the euro zone economy.
Foreign currency borrowing by households and companies has also grown rapidly and helped to keep the forint strong in the past two years.
Hungary's MKB Bank, a unit of Bayerische Landesbank said on Monday it suspended the issuance of foreign currency loans to protect clients from currency swings — the first, though so far isolated, sign that the global crisis may curb foreign currency lending in Hungary and the region.
The forint, which has been shielded by the central bank's high base rate of 8.5 percent, was floated in February. It had been a target of speculative attacks in the past when it still traded in a 30-percent band versus the euro.
