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Summary of Hungary's Public Debt Strategy and Currency in Circulation

Core Content

This document provides an analysis of Hungary's public debt strategy and the determinants of currency in circulation, focusing on the introduction of the Hungarian Government Security Plus Scheme (MÁP+) in June 2019 and its implications for the country's financial landscape. The report is prepared by the International Monetary Fund (IMF) as part of a periodic consultation with Hungary and is based on data up to November 12, 2019.

Main Objectives of Public Debt Strategy

Hungary's public debt management aims to:

• Reduce public debt levels through budgetary measures.
• Lower external debt vulnerabilities, especially by reducing reliance on foreign currency (FX) denominated debt and non-resident holdings.
• Develop an efficient government securities market, including increasing the share of domestic and retail investors.
• Promote a savings culture and financial literacy among the population.
• Reduce cash hoarding and support a more stable financial system.

Key Findings on Hungary's Public Debt

• Hungary's general government public debt peaked at 80.8% of GDP in 2011 and declined to 70.2% of GDP by end-2018.
• The share of foreign currency denominated debt has decreased from 48.5% in 2011 to 18.25% in 2019.
• Non-resident holdings of government securities dropped from around 40% to just below 25% during the same period.
• Resident holdings increased, particularly from households and financial institutions.
• Annual gross public financing needs in 2018 were 21.6% of GDP, though manageable due to high liquidity.
• The sustainability of public debt is measured by the real interest rate minus potential growth, which was at -4.9% in 2018.

Active Public Debt Management in Hungary

• The Hungarian Government Debt Management Agency (ÁKK) and the Hungarian Central Bank (MNB) have been instrumental in restructuring the public debt.
• MNB's Self-Financing Program (initiated in 2014) and ÁKK's Wholesale Program helped reduce the reliance on foreign currency debt.
• Retail Securities Program was introduced to encourage households to invest in government securities, making them more accessible and affordable.
• MÁP+ is a new retail government security introduced in 2019, with attractive features such as:
  • Higher yields compared to other retail bonds.
  • Automatic interest reinvestment.
  • No redemption charges except for a fee not exceeding 25 basis points.
  • Tax exemption on interest income for households since June 2019.
• The initial demand for MÁP+ exceeded expectations, with about HUF 2.1 trillion (41.5% of GDP) issued by September 2019.

Determinants of Currency in Circulation

• Cash usage in Hungary is influenced by:
  • Economic conditions such as interest rates and inflation.
  • Financial infrastructure and the availability of alternative payment methods.
  • Behavioral factors including the preference for cash among certain segments of the population.
• Hungary's currency in circulation is relatively high compared to peers, with a strong correlation to GDP per capita and interest rates.
• The share of HUF-denominated bonds has increased, while the use of foreign currency has declined.
• Cash demand is also affected by the tax treatment of government securities, as interest income from these is exempt from taxation, potentially shifting savings from other assets.

Implications of MÁP+

• Funding costs: MÁP+ is more expensive than domestic wholesale benchmarks, with an annual yield of 4.95% compared to 1.01% for the 5-year wholesale bond.
• Opportunity cost: Some market observers suggest that similar objectives could be achieved at lower yields, potentially reducing the budget cost.
• Arbitrage risks: Despite efforts to limit arbitrage, there are still opportunities for high-credit individuals to profit by borrowing in euros, converting to HUF, and investing in MÁP+.
• Yield curve effect: MÁP+ may influence the relative pricing of other debt instruments, potentially increasing bank funding costs.
• External risk reduction: MÁP+ contributes to reducing external vulnerabilities, though low tolerance for foreign exposure could limit its effectiveness.
• Monetary policy implications: MÁP+ helps mitigate the adverse effects of negative real interest rates on households and may allow for extended accommodative monetary policy.
• Fiscal impact: While MÁP+ increases the budget deficit, it reduces annual gross financing needs by extending maturities.

Conclusion

MÁP+ is a key part of Hungary's public debt strategy, aiming to reduce external risks, encourage savings, and lower cash hoarding. However, its cost-effectiveness and potential distortions remain under scrutiny. The success of MÁP+ depends on the balance between its objectives and the availability of cheaper alternative funding sources. The continued presence in international markets and diversification are also critical for maintaining financial stability and lowering financing costs. Ultimately, the effectiveness of MÁP+ is a political and economic trade-off that requires ongoing monitoring and adjustment.