Hungary’s economy gathers steam as the CDS premium falls below the 100 point-mark
Hungary has surpassed another benchmark: the five-year, CDS premium fell below the 100 point-mark, to 98 points, at the end of September in another sign that investors are upbeat about the economic outlook.
The Credit Default Swap (CDS) works like an insurance for credit agreements – the seller of the CDS compensates the buyer in case the debtor goes bankrupt. So, the price of the CDS is a direct indicator of how the market views the credit risk of a particular debtor. A lower CDS premium means that the market considers a debtor – in this case, Hungary – less likely to go bankrupt.
Hungary’s premium wasn’t always like this. In the years following the financial crisis, Hungary’s CDS premium crossed the 300-point mark, a sign of the unstable fundamentals created by the mismanagement of the Socialist-led government in the years leading up to the crisis. Back then, Hungary’s CDS premium ranked extraordinarily high in Europe, but today it’s lower than the premium of many other countries. Hungary’s CDS premium fell the most in the recent years.
This is yet another indicator that Hungary is taking the right economic steps. GDP data shows a stable economic structure, growth based on multiple pillars, with almost every sector contributing. Economic growth has not generated any further debt. The central government’s annual budget deficit, on the contrary, has been firmly below the 3-percent threshold in recent years, and the indicator has improved more markedly than others in the EU. This change can be accredited to the Orbán Government’s prudent fiscal policy, sensible debt management and steady economic expansion.
In the first seven months of 2017, external trade posted a surplus of 5.2 billion EUR. As a result the current account showed a surplus of 5.8 percent of GDP as we move into the second half of 2017. Other trends also point to positive developments in the Hungarian economy since 2010.
In August, Standard and Poor’s boosted Hungary’s credit rating outlook from stable to positive, forecasting a credit rating upgrade for the country. The credit rating agency cited expectations 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 absorption of EU funds; rising employment and real wages; increasing expenditure on housing subsidies; and stronger private sector balance sheets. In other words, 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.
The CDS premium falling below the 100-point mark adds yet another reason why investing in Hungary’s economy is a smart decision. Hungary has been on the right path with an encouraging economic outlook, underpinned by the six-year wage agreement, tax cuts and the government’s measures to boost competitiveness.
Hungary’s recovery is gathering steam, and while some once dismissed the Orbán Government’s economic policies as unorthodox, the reforms are clearly working.