Goldman Sees Orban Risk as Hungary Bonds Lag: East Europe CreditAndras Gergely and Krystof Chamonikolas
Goldman Sachs Group Inc. said Hungarian Prime Minister Viktor Orban’s re-election means “unpredictable” policies that risk weighing on growth, as the nation’s bonds suffer East Europe’s worst returns after Russia.
Government bonds lost 1.6 percent this year in dollar terms, while the Bloomberg Emerging Market Local Sovereign Index gained 1.6 percent. The forint weakened as much as 0.6 percent from a two-month high and bonds dropped yesterday after Orban’s Fidesz party won 67 percent of the seats in parliament in an April 6 vote, according to preliminary results.
While Orban cut the biggest debt burden among former communist European Union members, he roiled investor sentiment in his last term by appropriating $13 billion of pension assets, saddling banks with mortgage losses and driving out foreign-owned utilities. His “unpredictable style of policymaking” will last as his past policies “weigh on Hungary’s growth prospects,” Magdalena Polan, a London-based economist at Goldman Sachs, said by e-mail April 6.
“Fidesz won’t really have an incentive to change its economic policy after this victory,” Zsolt Kondrat, head of research at MKB Bank Zrt., a unit of Bayerische Landesbank, said by phone from Budapest yesterday. “And unless it does, there won’t be much of a sustained gain in the forint or a drop in yields.”
MKB expects Hungary’s 10-year forint bond yield to rise to 6.2 percent by the end of the year from a close of 5.66 percent yesterday and an average of 5.85 percent in the past 12 months.
Fidesz secured an “unambiguous” mandate to continue the policy course it started four years ago, Orban said in Budapest yesterday. The Economy Ministry declined to respond to e-mailed questions regarding the government’s future policy.
Hungarian stocks underperformed peers in emerging markets during Orban’s first term as his government changed the constitution, levied extraordinary taxes on industries from banks to telecommunications providers, and rejected concern over the erosion of democracy as lobbying for foreign interests. The BUX index tumbled 29 percent in the past four years compared with a 3.1 percent retreat in the MSCI Emerging Markets Index.
While gains of 39 percent on forint-denominated debt were the best among the three major eastern European countries since Orban took office in May 2010, those returns shrunk to a region-worst 6.6 percent when adjusted for price fluctuations, according to the Bloomberg riskless return ranking. Polish debt handed investors 9.4 percent and Czech securities 7.2 percent in a risk-adjusted ranking of indexes from the European Federation of Financial Analysts Societies in the period through the end of last week.
Orban’s cabinet “will continue to hold an unprecedented degree of control over the direction of economic policies,” Goldman’s Polan wrote. “The government will press on with its plans to extend the state’s control over the economy.”
The premier has used the proceeds from the pension takeover and industry taxes to keep the budget deficit below the EU ceiling of 3 percent of gross domestic product since 2011. GDP grew 1.1 percent last year after contracting in 2012. Industrial production increased 8.1 percent in February from a year earlier, the biggest jump in three years, statistics office data showed today.
Hungary’s Eurobonds are attractive as the economy picks up and the yields exceed peers such as Romania, Gyula Toth, who oversees $550 million of assets as a money manager at Ithuba Gapital AG in Vienna, said by e-mail yesterday.
The premium investors demand to hold Hungary’s dollar bonds over Treasuries widened one basis point to 266 today, compared with 194 for Romania, according to indexes from JPMorgan Chase & Co. The forint strengthened 0.5 percent to 305.15 per euro by 12:39 p.m. in Budapest while yields on the government’s 10-year local-currency debt fell eight basis points, or 0.08 percentage point, to 5.57 percent.
Hungary’s public debt burden fell to about 78 percent of GDP last year from 82 percent in 2010, data from the European Commission show. The country’s current-account surplus also reached a record 2.9 billion euros in 2013, the central bank said March 31.
While Orban’s policies helped reduce Hungary’s budget gap, domestic yields fell too low after 20 consecutive months of cuts in the benchmark interest rate to a record 2.6 percent, according to Lutz Roehmeyer, a money manager at Berlin-based LBB Invest overseeing $1.1 billion of developing-nation debt.
“Interest rates in Hungary are too low and politically influenced by the new setup of the central bank,” he said by e-mail yesterday. “It doesn’t pay to go into Hungarian risk,” said Roehmeyer, who has an underweight position on the country.
Gyorgy Matolcsy, the central bank’s president, was the architect of much of Orban’s self-styled “unorthodox” policies as the economy minister until March 2013.
The election gave an opposition alliance headed by the Socialist Party 19 percent of the parliament seats, while the Jobbik party, which wants a referendum on EU membership, secured 12 percent. Jobbik’s showing may embolden Fidesz to pursue similar or even more drastic policies than it did in its last term, Nora Szentivanyi, a London-based economist at JPMorgan, said in an e-mailed report yesterday.
“Potential for renewed confrontation with the EU and increasingly nationalistic rhetoric are risks worth watching,” Szentivanyi wrote.