Hungary risks a “mass exit” from its debt and currency markets if foreign investors’ sentiment toward the country worsens after it bypassed International Monetary Fund aid, Fidelity Investments said.
Prime Minister Viktor Orban’s cabinet may need to reconsider the decision to try to finance itself as Hungary is over-reliant on foreign support in the market, with international investors holding 46 percent of local debt, said R. Aran Gordon, who helps manage $1.2 billion in emerging-market debt at Fidelity Worldwide Investment in London.
“Should things unravel further, and local debt becomes less attractive, therein lies a potential problem because of the potential for a mass exit,” Gordon said in an interview in Budapest yesterday.
International investors held 4.85 trillion forint ($21.8 billion) in forint-denominated bonds and bills as of today, compared with a record 5.08 trillion forint at the end of last year, according to data from the Debt Management Agency on Bloomberg. The forint slid 0.4 percent to 293.86 per euro by 5:16 p.m. in Budapest, extending its slump this year to 0.9 percent this year after an 8.1 percent rally in 2012.
Hungary raised $3.25 billion on Feb. 12 in its first sale of foreign bonds in 21 months. The government opted for market financing after more than a year of disputes with the IMF on budget policy and central bank independence.
“There are still those that don’t rule out that there will be a mind-set shift to being more open to that type of a tool,” Gordon said of Hungary’s chances for an IMF loan. “The economy is not in the greatest shape and there needs to be that stimulus to be able to generate domestic demand.”
Hungary’s financing needs in 2013 are the largest among its peers in central and eastern Europe, at 19 percent of gross domestic product, Moody’s Investors Service said on Feb. 8. Moody’s rates Hungary’s at Ba1, one step below investment-grade, with a negative outlook. The rating company also highlighted the risk posed by the high ratio of non-resident investors in Hungary’s bond market.
Yields on Hungary’s 10-year forint-denominated bonds fell four basis points, or 0.04 percentage point, to 6.236 percent, the lowest in five weeks. The yield fell to a seven-year low of 5.99 percent on Jan. 3, compared with 10.8 percent a year earlier, according to data compiled by Bloomberg.
Fidelity is “underweight” on Hungary’s debt and “short to neutral” on the forint, Gordon said.