Event

On 12 August, the Hungarian government and central bank repaid ahead of schedule all remaining obligations (about US$ 2.85 bn) vis-à-vis the IMF, originally due later in 2013 and in 2014. The loan reimbursed had been granted in 2008 and 2009 under a Stand-By Arrangement amid financial market tensions.

Impact on country risk

The government’s move is seen as a politically oriented signal ahead of next April’s parliamentary elections, rather than an economically justified one. As a matter of fact, it has long been PM Orban’s willingness to sever troubled ties with the IMF and to secure financial and political sovereignty, hoping this will restore some of his lost popularity. On the economic side, the move should not deteriorate the non-transfer risk in the short-term as the funds used for repayment were already available thanks to a previous bond issuance and the accumulation of fiscal reserves. Besides, contrarily to what happened in other neighbouring emerging markets, confidence in the country has remained resilient, positively influenced by a large current account surplus and expectations of continued forint stability. Nonetheless, the considerably higher interest rate of the replacing debt raised through capital markets will add to the weight of the already high level of public external debt. Also, it will spark potential difficulties for the government to raise funds and to repay maturing debt obligations in case of a general withdrawal from foreign investors in emerging markets at medium term.

Analyst: Florence Thiéry, f.thiery@credendogroup.com