Q3 government sector data reported: the government looks interested in a strong forint at year end

HUNGARY - In Brief 20 Nov 2023 by Istvan Racz

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The MNB released its preliminary data on Q3 financial accounts by sectors, including the government sector's net borrowing requirement (NBR) and its consolidated gross debt. This shows the NBR at 5.9% of GDP in January-September and the gross debt ratio at 75% of GDP at end-September. The NBR, typically a close proxy for the main deficit indicator, looks fine: it is coming from 7.3% in H1, and it is moving nicely in the direction of the revised deficit target of 5.2% of GDP for the whole year. But the gross debt ratio looks ugly: the end-2022 ratio was 73.3%, and the official projection for end-2023 has been only 69.7%, marking a substantial drop, to slightly below 70%. There is a legal requirement for the debt ratio to fall each year, and even though emergency situations like Covid, etc. may provide a reason for that requirement not to be met, it could prove difficult to establish that there is a case of emergency in the current situation. This is because the government should convince rating agencies, which would be unhappy about a big slippage, just as they are already unhappy about the lack of progress on the access to EU funds. There are a few ways for making the end-year debt ratio look lower, each having only a limited potential though. One of these ways is to keep the forint strong  until the year has turned, as the debt ratio is quite sensitive to the exchange rate, because of the 28% share of FCY-denominated debt in June 2023. E.g. the current EURHUF 379 exchange rate would imply a more than 1%-point lower debt ratio than a hypothetical EURHUF 400 rate at the end of December. Based on this, it is very well possible and even likely that the government will be ...