A slight problem with the government debt ratio

HUNGARY - In Brief 20 Aug 2015 by Istvan Racz

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Until now, we have been saying that should the cash deficit target of 2.7% of GDP be achieved, the general government debt ratio would most probably fall moderately, to 76.2% of GDP at year end from 76.9% of GDP at end-2014. In July, we also said that budget implementation was running largely on track, save for the uncertainty around the payment of development grants by the EU in late 2015, which seemed to be a major source of risk. However, based on end-June government debt and the July budget results, we are now saying that the government's recent asset purchases, including the acquisition of Budapest Bank, represent another reason for concern, that the debt ratio might in fact increase moderately in 2015 even if the deficit target is achieved, and that the risk of significant payment delays by the EU in late 2015 is increasing. The new fiscal data is telling that although the general government's cash deficit was only 0.9% of GDP in H1 2015, which is an excellent result and exceeded expectations, of course, the government's debt ratio still rose to 79.6% of GDP by end-June from 76.9% at end-2014. More than half of this increase was due to the weakening HUF, but a significant contribution was also made by ex-budget transactions, notably investment in assets other than deposits. This item reached HUF 358bn (1.1% of annual GDP) in H1 2015. A big part of the latter was the government's HUF 195 bn acquisition of Budapest Bank, which was financed by a loan from MFB, the government's ex-budget development agency. It was officially hoped that BB's acquisition would not go into government debt, but apparently Eurostat insisted that the buyer of the bank, a subsidiary set up ...