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Hungary trims 2022 budget deficit target to shield local bond market

Hungary trims 2022 budget deficit target to shield local bond market

Hungary is cutting its 2022 budget deficit target to 4.9% of GDP from 5.9% as fiscal policy will be less supportive next year, Finance Minister Mihaly Varga said on Friday, after months of huge spending increases.
Just days after the National Bank of Hungary (NBH) ended its massive bond purchase programme, and with tax cuts and big state expenditure due in the first quarter ahead of an election in April, the government is likely trying to mute pressure on the local government bond market where yields have increased in past weeks, some analysts said.

Varga told a news conference the economy was expected to grow by around 5% next year after 6.5% this year as it recovers from the pandemic and there was room to start reducing the deficit, which was planned at 7.5% of GDP this year.

The government of Prime Minister Viktor Orban, who faces a potentially close election race, has gone on a spending spree, pledging families hefty tax rebates for 2022, raising wages and pensions and cutting taxes on employment by 750 billion forints.

However, on Monday the government unexpectedly postponed a planned purchase of Budapest's international airport and froze investments and spending worth 350 billion forints ($1 billion), after the November monthly deficit alone swelled above 1 trillion forints.

In addition, the European Commission has withheld EU recovery funds from Hungary and Poland over rule of law concerns.

"Government announcements to postpone the re-nationalisation of Budapest Airport and some additional public investments signals a step towards easing government debt supply as Hungary's access to EU Funds remains limited until at least post-elections," Citigroup said in a note, adding that fiscal policy would remain expansionary early next year.

"According to our estimate, fiscal deficit may exceed 3% of annual GDP in Q1 2022, given the front loaded nature of the announced fiscal measures."

Varga did not elaborate on what caused the shift. He said a fast economic recovery allowed the reduction of the deficit target, which he said "was expected to reduce Hungary's risks".

As global central banks start withdrawing their stimulus, and the Hungarian central bank hikes interest rates to curb spiking inflation and also ends its QE programme, Hungarian bond yields have jumped. The 10-year yield is around 4.38% now.

According to central bank data, the NBH had increased its forint-denominated bond holdings by more than 1.9 trillion forints in January-October under its QE programme. At the same time, commercial banks have been reducing their bond holdings in the past months.

The debt agency AKK on Friday announced Hungary's 2022 financing plan, in which it plans to switch at least $2 billion worth of foreign currency bonds expiring in 2023 and 2024 for longer dated fx bonds in the second half of next year. The AKK has reduced planned forint denominated bond sales at auctions substantially.

($1 = 324.5900 forints)

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