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Sep 14, 2017 - Zoltán Kovács

Hungary enters era of negative interest financing

Hungary has crossed another significant economic milestone: selling state bonds at zero or negative interest rates. Looking back at where the country was seven years ago, we should be proud

When judging a country’s economic performance, analysts risk a degree of professional credibility, but investors risk much more: their (or their clients’) money. Regardless of whether you choose to believe investors or analysts, both have a high opinion of the Hungarian economy of late. That’s not the way it has always been.

In 2010, 12-month state bonds were sold at an interest rate above six percent. Even at these relatively high rates, Hungary had a hard time getting the market to buy. The country was tumbling through a downward spiral at all three major credit rating agencies, including Standard and Poor’s. Hungary just couldn’t get investors to invest in the country’s future.

After eight years of Socialist governments (2002-2010), Hungary looked worse than ever to potential investors. While the financial crisis didn’t help, the reason it struck us hard was because the country, since 2002, had become too exposed to overcome the turbulence of the global economy. Hungary already had a high base rate (around eight percent between 2006 and 2008), which jumped to 11.5 percent in 2011. The state debt was growing exponentially and the country’s debt-to-GDP ratio grew from 55 percent in 2002 to 80.5 percent in 2010. Meanwhile, unemployment was on the rise and GDP growth was either negative or insignificant.

Today, after nearly eight straight years of Orbán Government, the country looks more tempting to investors than ever before.

In August, Standard and Poor’s upped Hungary’s credit rating outlook from stable to positive, forecasting a credit rating upgrade for the country. Their reasons included an expectation that real GDP growth would reach 3.5 percent in 2017, largely due to booming consumption triggered by fiscal stimulus and minimum wage hikes. They also cited the gradual reduction in the bank levy; substantial recovery in EU fund absorption; rising employment and real wages; increasing expenditure on housing subsidies; and stronger private sector balance sheets. In other words, S&P analysts think it’s a great time to invest in Hungarian state bonds.

Investors agree. In recent weeks, Hungarian state bonds are selling regularly at or below zero percent interest rates. It no longer comes as a surprise that there are investors out there who are willing to pay to keep their money in Hungarian state bonds, at least for the short term.

Longer term state bond papers look great as well. During the August 24th auction, the 12-month state bonds were sold at an average yield of 0.07 percent. A week later, the average interest on the 3-year state bonds was at 0.69 percent – a new, historic low.

These momentous changes, especially for longer term state bond market, are signs that Hungary’s financing will remain at a low interest rate or drop even lower. Accepting these negative yields is a sign of investor confidence.

In 2002, the Socialists took a flourishing economy and nearly destroyed it. Since 2010, Hungarians have been working to overcome that dramatic setback and are now in the midst of a healthy recovery. Reaching this point of zero and negative interest state financing is a significant milestone in Hungary’s path to economic stability and further growth.