Non-resident Investors in the Local Currency Market – the case of Hungary World Bank Webinar András Réz, ÁKK Head of Planning, Research and Risk Management May 15, 2014 1
Agenda 1. The Macroeconomic Situation in Hungary, 2. Public Debt of Hungary, 3. How to Attract Non-resident Investors? 4. Pros and Cos of Non-resident Investors in the Domestic Market, 5. Monitoring Non-resident Investors in the Domestic Market, 6. Lessons learned. 2
The Macroeconomic Situation in Hungary ESA Deficit (% of GDP) GDP Growth Rate Yearly Average) 6 6 4 4 2 2 0 0 ‐ 2 ‐ 4 ‐ 2 ‐ 6 ‐ 4 ‐ 8 ‐ 6 ‐ 10 ‐ 12 ‐ 8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Inflation Rate (Yearly Average) Current Account (% of GDP) 10 4 9 2 8 7 0 6 ‐ 2 5 ‐ 4 4 3 ‐ 6 2 ‐ 8 1 ‐ 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 After the crisis in 2008-9 Hungary underwent a large adjustment which balanced the economy and the public sector. Curren account is positive, public debt ratio started to decline. 3 Macroeconomic correction still has a cost in the growth rate.
Public Debt of Hungary Public Debt (% of GDP) Public Debt (% of GDP) Composition of Debt Portfolio Composition of Debt Portfolio 100% 90% 80% 70% 60% Other (MtM) 50% External Public Debt 40% 30% Internal Public Debt 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Debt ratio increased steadily to above 80pc by 2010 Share of FX debt increased up to 50pc during 2008-11 (role of IMF/EU FX loan) Government’s objective is a gradual decline of the debt ratio and higher share of domestic debt in the 2010s 4
Investors’ Base Foreign Holdings of Domestic Government Securities Foreign Holdings of Domestic Government Securities Investors of Domestic Government Securities Investors of Domestic Government Securities 6 000 45% 40% 5 000 35% 30% 4 000 Banks 25% Pension & Insurance 3 000 20% Other Financial 15% 2 000 Households 10% Other Resident 1 000 5% Non ‐ resident 0% 0 2008. Q1 2008. Q3 2009. Q1 2009. Q3 2010. Q1 2010. Q3 2011. Q1 2011. Q3 2012. Q1 2012. Q3 2013. Q1 2013. Q3 1. Financing problems of Hungary in 2008-9 was associated with a sizeable decline of non-resident ownership of domestic bonds 2. After macroeconomic adjustment – improved deficit and C/A - non-resident investors returned from 2010 3. Households became an important investor group beside the previous 3 (foreign investors, banks, pension&insurence) 4. The role of pension funds declined because of pension reform. 5
How to Attract Non-resident Investors? Non-resident investors were always important investors of Hungarian public • debt, but usually in foreign currencies, Hungary is a regular issuer in the international market, and its domestic • securities market is well developed (yield curve up to 15 years), Building up large bond series by reopening old series (liquidity is important for • non-resident investors) Institutional framework was established in the 1990s (debt office, settlement, • benchmarks and indices were published), As a part of joining the European Union market standards (yield calculation, • interest payment frequency) was adjusted to international standards Primary dealer system is a key factor in building and developing primary and • secondary market of government securities, with a role of inviting investors to the market, Foreign banks were PDs since 2008 and remote PDs were allowed in 2010. At • present 6 PDs are foreign or remote out of 14, ÁKK have regular non-deal roadshows, and bilateral investors meeting to attract • non-resident investors. 6
Pros and Cos of Non-resident Investors in the Domestic Market I The main reason for attracting foreign investors to the local currency debt • market is to increase investors base and competition Domestic investor base can be limited, oligopolistic and demand sorter term • securities Foreign investors compete with local investors pushing yields downwards • Foreign investors can demand usually longer term securities therefore • developing domestic yield curve Given the limited absorbing capacity of the local investor base non-resident • investors are needed to finance extra budgetary programs 7
Pros and Cos of Non-resident Investors in the Domestic Market II The main element of risk associated with non-resident investments in local • currency instruments is the potential drastic sell-off during a crisis Non-resident investors can invest or divest at the same time as a reaction • to global or regional events – that may result in difficult-to-manage large swings Between the middle of September 2008 and beginning of December 2008 • (merely 2.5 months time) non-resident holdings of Hungarian government securities fell by HUF 942 billion (approximately EUR 3.6 billion) To put it in contrast: GFS based general government deficit for the year • 2008 amounted to HUF 990 billion This is a low probability event but with strong adverse effects • ÁKK manages this risk with higher cash buffers after the crisis for longer • period of market stress and develop liquidity management 8
Monitoring Non-resident Investors in the Domestic Market Monitoring is extremely difficult due to lack of detailed data • Bloomberg covers a plethora of entities (holding approximately 40% of HUF • instruments owned by non-residents) based on SEC reports; These entities are US funds; no reliable information available for the rest of • the market One-on-one meetings can be of some use • In Hungary Templeton is the largest investor and as such monitored with • distinction KELER (clearing house in Hungary) provides no detailed data • KELER provides aggregate data of non-resident investors on a daily basis • 9
Lessons learned Foreign investors are important group of investors in debt management • Exchange rate risk can be reduced by inviting non-resident investors into • the domestic market which help develop the market (but with some risk) Non-resident investors require a certain degree of domestic market • development and prodent macroeconomic policy – and their participation support further developments Risk stemming from too high foreign ownership can be reduced with • balanced maturity profile and high duration and cush buffers During a crisis foreign investors can sell their portfolio which can limit the • DMO access to market by auctions Balanced investors base is needed with strong local investors base • 10
Thanks for your attention ! More info on Hungarian public debt management at: www.akk.hu 11
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