MNI INTERVIEW: Hungary Lengthens Debt As Cenbanks Ultra-Easy

Hungary will lengthen its government bonds' maturity profile as much as possible in case financial markets turn nasty upon the eventual withdrawal of central bank pandemic emergency measures, the head of the country's debt management agency told MNI, adding that EU funding will assist the country in managing upcoming redemptions of foreign currency debt.

"Our average maturity was below four years at the end of last year, and we aim to get very close to five years by the end of this year. So we are going to be able to extend duration this year, in a turbulent market, which is the right thing to do," AKK's Zoltan Kurali said in an online interview, adding that his team wanted to be ready in case central banks turn off the taps on extraordinary policy.

"I can't imagine that the tapering of all this support will happen in a bad market environment, during a recession or in a deflationary environment, but we are thinking about this a lot," he said. "Our maturity extension is preparing for that, increasing duration. That gives us some leeway against repricing. And then we are trying to extend this as far as the market allows."

Kurali added: "We're much better prepared. Our liquidity reserves are probably at least three times as high as when we went into March. That in itself will give us a lot more flexibility and freedom to act."

Hungary is 75% of the way to completing its annual issuance target of 11 trillion HUF equivalent, including switch auctions, of which close to 5 trillion is government bonds. Some 80% of 4.1 trillion HUF in retail bond issuance has been completed, while AKK's multi-tranche samurai bond issuance took place earlier this month.

SWITCH AUCTIONS

"We've done quite a lot of switch auctions and buybacks to buy back one-year paper and switch two-year paper into nine, up to potentially 15- or 20-year paper,"

The country issued its first 20-year institutional bonds this year, while the 15-year bond is already outstanding for over a billion dollar equivalent, "which will hopefully make it eligible for global bond indices at some point in the near future," Kurali said.

Hungary also extended maturities on the FX side, Kurali said, with USD1.64 billion of dollar bonds maturing next year, USD3.5 billion maturing in 2023 and around USD1.5 billion in 2024.

"Other than that FX debt is spread out beyond that. We will also have a sizeable EU funding coming through which will help us to manage those FX redemptions," he said, adding that no additional FX issuance was anticipated in 2020.

This year saw Hungary launch EUR1.5 billion in green bond issuance, two-thirds of which was taken up by ESG investors, while the remainder was allocated to either long-term or new investors following the announcement in February of the Hungarian government's new environmental strategy.

SHIFT AWAY FROM DOLLAR

"We've been trying to shift away from dollar-denominated debt and towards more euro and Asian-currency-denominated ESG," he explained. "The green bond fitted with that more resilient, more hold-to-maturity investor base and makes us less exposed to EM volatility."

The AKK has devoted considerable thought to the possible effects of the European Central Bank's eventual unwinding of its pandemic emergency purchase programme, Kurali said, though he did not have a view on when that process might begin.

"We need to see some proper recovery, or some proper resolution to the pandemic, some time next year," Kurali said, though he was clear that no nation is likely to return to being "100% the same economic construct" it was pre-pandemic. Policy mistakes provide an additional source of risk, especially if politicians are tempted to withdraw fiscal support too soon.

"The question is going to be what is the supply-demand dynamic when central bank measures are tapered and what is the overall yield environment. It's going to be a balancing act, but we're prepared for that. So we're conscious of this risk, but it's very manageable."