Playing down a local
media report, the International Monetary Fund’s (IMF) Resident Representative
in Budapest said the Fund has no plans to send a
team to Hungary
in April, and there has been no change in the situation around talks on a
potential aid deal. The forint has weakened on the announcement and dragged its
regional peers with it. Analysts see chances of Hungary securing an IMF/EU credit
line slipping further away in time. Some already believe no deal will be made
before the third quarter of the year. The general view is that for another two
to three months the cabinet will be under no funding pressure.
Likelihood of a quick credit deal fades
The insufficient commitment of the Hungarian government has been in the remarks
of several analysts over the past few weeks. These also included the projection
that the actual aid deal could be made considerably later than thought so far.
On Monday, it was Morgan Stanley that expressed such view and Barclays Capital
followed suit today.
Morgan Stanley’s strategy note for March did not exclude the possibility
that Hungary
will start formal aid talks with the IMF/EU only after the European Commission
received an acceptable response by Hungarian authorities on the issued it
raised in scope of the infringement procedures against the country. MS
economists expect a deal in June at the earliest, noting that there is a risk
that the credit agreement will be reached only in the second half of the year.
Considering the existing disputes it is unlikely that the cabinet will strike a
deal with the IMF and the EU before the third quarter of 2012, Barclays
Capital said today. Although public financing is ensured amidst the current
external market conditions, Hungary
will later need this deal in order to ensure the medium-term sustainability of
this funding. BC’s economists noted that while forint debt issuance is somewhat
ahead of schedule in the first quarter, major redemptions are coming in May and
June. They believe that overall Hungary
must have this IMF/EU deal "otherwise the medium-term financing programme
may not be achievable."
Gyula Tóth, Head of EEMEA FI/FX Strategy at UniCredit in Vienna, said in a
research note today that "we need to see a sharp and sustained
deterioration in market conditions before the government considers giving into
IMF/EU conditionality at any stage over the coming 3-4 months."
According to his estimates the government currently has sufficient HUF and FX
to hand without issuing until August and October respectively. At end-February
the Government Debt Management Agency (ÁKK) had EUR 2.1 bn and EUR 2.6 bn in
HUF and FX deposits respectively, the analyst added.
"The current level of its HUF cash pile is about 30% above its 5 year
average while its FX deposit pile is 45% above its long term average."
In Tóth’s view, the government's challenge remains an
increase in its FX stockpile. The government faces EUR 4.2 bn in FX repayments
this year followed by EUR 5.5 bn in FX repayments in 2013. In terms of peak
months this year, July and November stand out with EUR 0.6 bn and EUR 1.5 bn in
repayments scheduled respectively.
"Currently the government has sufficient FX to hand to last until October.
Thereafter it may opt to draw off two other sources of FX. First EU inflows
should amount to EUR 1-1.5 bn in EU inflows per year - if imposed EU cohesion
funds will be frozen only next year. This would cover the domestic authorities'
November FX needs," Tóth said.
He also pointed out that the authorities still have EUR 500-700 m available
from the reversal of the second pillar pension system. Assuming an EUR 0.5 bn
drawdown from pension funds, the authorities may just about buy themselves
until next end February next year, the analyst noted.
The ability to draw off NBH FX reserves is uncertain
"The nuclear option remains a drawdown in NBH FX reserves beyond what the
government already has on deposit there to cover external funding needs beyond
October/November but this is not easily executed," Tóth said.
He reminded that the government in the most recent past has shown a willingness
to push ahead with policies at the expense of FX reserves. For example the FX
mortgage conversion scheme saw a run-down in FX reserves equivalent to EUR 3.6
bn. The analyst added, though that this was offset by a decline in external
indebtedness but even once adjusted for this, Hungary FX reserve ratios require
bolstering.
Over recent days Economy Minister György Matolcsy has put forward concerns
related to the cost of maintaining a relatively high level of FX reserves.
"The challenge facing the government is that any drawdown of FX reserves from the asset side of the NBH balance sheet will have to be matched by delivery of HUF to the central bank. At this stage it is unclear if the government can generate sufficient HUF to cover this," Tóth said.
No pressure to strike a deal for 2-3 months
With all of the above in mind, the government is "not under pressure to
reach a deal over a 2-3 month horizon," Tóth said.
Assuming relatively stable domestic fixed income markets, "this debacle
will likely spill over into at least 3Q while any Eurobond issuance between now
and then could provide the government with just enough support to get through
this year."
"Of course this does not represent a stable equilibrium. Any pressure on
HUF or domestic debt markets will change dynamics. However it may be an
equilibrium that the government is happy to live with to avoid giving into
EU/IMF demands."
