In the surveyed period the role of debt instruments played in financing changed significantly (Chart 3-17).
In 1995 the weight of government bonds was only 35 percent within the stock of debt, while the stock of loans reached historical highs, it totalled to 55 percent of the GDP. After 1995 significant changes took place in the financing of the Hungarian general government (see later), as the consequence of which the situation reversed by 2005 and government securities represented 90 percent of the total debt while major part of loans had been repaid. In 2008 a new borrowing wave started, as a consequence of which the share of government bonds within government debt dropped to ca. 70 percent by 2010. In the period passed by since then, the focus was one again on loan repayment, thus, the value of loans relative to the GDP was only around 10 percent at the end of 2014.
Changes impacted not only the distribution of debt by instruments, but the role of lending sectors restructured fundamentally (Charts 3-18 and 3-19). At the beginning of the period surveyed, in 1995 greater part of the government debt was outstanding vis-à-vis the central bank. Reason for this was that, until the beginning of the 1990s, the central budget was
Chart 3-17
securities and loan type debt elements as the percentage of the gDP
0 20 40 60 80 100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Percentage of GDP
Debt held in loans Debt held in securities Sources: MNB.
Chart 3-18
Distribution of the stock of securities by main creditors
0 20 40 60 80 100 Per cent
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Financial corporations Rest of the world Central bank
Other Sources: MNB.
Chart 3-19
Distribution of the stock of loans by main creditors
0 20 40 60 80 100 Per cent
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Financial corporations Rest of the world Central bank
Other
Sources: MNB.
financed almost exclusively by the MNB through forint loans. By 2007 the loans granted by the central bank had been repaid and the MNB’s role in debt financing became insignificant. The central bank has never had a dominant role in the purchase of government bonds, however, the Hungarian credit institutions were from the beginning present in the bond market, their share was around 40-50 percent considering the period as a whole, and a restructuring is only observable from 2010 for the benefit of households and foreign investors.
As the central bank’s role narrowed in the debt financing, the role of foreign investors gained value.
The GDP-proportionate rise in the direct external debts of the government sector commenced in 1999, when the state issued foreign exchange bonds abroad for the first time. By 2011 65 percent of government debt was financed by foreign creditors, and within this, the share of 90 percent in terms of borrowing was outstanding.
As a consequence of strengthening presence of foreign creditors and the market entry of FX bonds the significance of debt held in foreign currency increased from the mid-1990s (Chart 3-20). This was associated with the debt swap between the central bank and the state (from then on the central bank recorded its foreign debt vis-à-vis the general government in the form of foreign exchange loans), which in itself increased the foreign exchange debt by HUF 1,800 billion (to the expenses of forint debt), and hereby the ratio of foreign exchange items rose to 40 percent.
It is worth noting here that not all foreign debt is foreign exchange debt; subject to the yields and exchange rate risks foreign investors prefer from time to time government securities denominated in forint.
The period between 2000 and 2008 was primarily characterised by high stocks of forint government securities held by non-residents, which was ended by the selling wave triggered by the economic crisis.
In the period following the debt swap up until 2002 the ratio of foreign exchange debt in relation to the GDP reduced year-to-year, and from 2003 it began to increase slowly. From 2008, as a consequence of the economic crisis, financing of the deficit of the general government was possible from domestic sources only to a more limited extent compared to the previous periods, therefore, the need for external funding increased significantly, which entailed the increase of foreign exchange debt. The ratio of foreign exchange debt within the government debt reached in 2008 again the level of 1997 (ca. 40 percent), and it continuously increased in the subsequent years (in 2011 more than half of government debt was in outstanding in foreign exchange). From 2012 the sock of foreign exchange debt showed again a decrease as a result of the repayment of previously drawn loans, to which also the strengthening of forint exchange rate contributed.
thE ChAngE of DEbt AnD forEIgn ExChAngE
With the increase of the weight of foreign exchange debt the revaluations due to the changes of exchange rates gained increasing role in the development of government debt. In the case of foreign exchange debt the net borrowing (transaction) associated with the financing need in itself does not explain the changes to the stock of debt: as a consequence of the weakening of forint the debt held in foreign exchange appreciates and it reduces if the forint strengthens.
Up to 1996, changes in the volume of debt approximated the value of transactions, as revaluations were essentially not involved. Within the volume of debt, the share of foreign exchange loans remained below 8 percent. The stock increasing effect of revaluations was concealed by the indirect indebtedness of the state in forint, through the MNB. The revaluation loss was incurred by the central bank, presented in the government debt as the transaction change in so called zero interest debt.
Chart 3-20
Changes to the forint and foreign exchange debt of the general government as the percentage of the gDP
0
Debt denominated in foreign currency Debt denominated in forint
Sources: MNB.
After the debt swap (1st January, 1997) changes in the exchange rates had direct impact on the development of the debt. Within the surveyed period, a number of appreciation and devaluation waive made their effects felt in the development of the debt ratio. In the period between 1997 and 2000, as a consequence of the continuous devaluation of forint, the debt appreciated by 1-3 percent of the GDP each year. Between 2001 and 2009, considering the period as a whole, the changes to the forint exchange rate did not influence considerably the development of debt. In 2010 and 2011 the weakening of the exchange rate in itself increased the stock of debt expressed in forint by 6,7 percent of the GDP, which was somewhat compensated by the strengthening of the forint in 2012. In the period passed by since then, as a consequence of the continuous weakening of forint the revaluation in itself had a debt increasing effect, but the decrease of debt held in foreign exchange stemming from transaction mainly compensated this, thus, the stock of foreign exchange debt expressed in forint remained basically unchanged.
Chart 3-21
Changes to and components of the stock of debt
–2,000 –1,500 –1,000 –500 0 500 1,000 1,500 2,000 2,500 3,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 HUF Billions
Transaction of debt denominated in forint Revaluation on debt
Transaction of debt denominated in foreign currencies Change in government debt
Sources: MNB.
3.4 general government deficit and general government debt
The Maastricht Treaty of 1992 founding the European Union aimed at introducing a single currency. The minutes annexed to the Treaty specified the economic requirements, which must be met by the countries wishing to accede. Two of the five criteria (extent of interest, exchange rate, inflation, government deficit andpplies to the indicators of general government finance.
In order to allow for the measuring and verifying the convergence performance of the individual countries uniform indicators must be used. However, the dimension, system of institutions and recording of transactions of the general government differ from country to country.
In order to achieve its objectives, the European Union needed uniform indicators, thus it either would have had to define uniformly the institutions system of the general government and the indicators in the requirements, or had to choose indicators which are available in each member state based on uniform methodology. Thus the lot fell on the data on general government derivable form the European system of national accounts. Pursuant to this, the concept of general government coincides with the concept of general government (government) in the national accounts, the budgetary deficit corresponds to the data on the ratios of net lending (net lending/
borrowing position) in the national accounts and the government debt can be derived from the ESA financial instruments.
The rules of national accounts however are too general to suit the stringent fiscal control. In this system, the entire accounting of the national economy, in other words of all sectors of the national economy are compiled in the same way. The categories used in the system must be suitable for capturing and classifying the activities of each economic operators.
In the system, the typical economic operator is the non-financial corporation. The rules adjust primarily to the activity of this sector, and modifications allow to apply them to the other sectors within the system of national accounts. The Eurostat being responsible for the data quality tries to eliminate the problem
by preparing and publishing various methodological notes in cooperation with the member states and the European institutions involved–the European Commission, the European Central Bank– and makes them to be applicated compulsory for the member states. It publishes resolutions and guides17, which are then included in a methodological manual,18 and updated nowadays annually, thus the methodological notes is continuously extending. The general government has economic relations to each economic sector of the national economy. Each changes to the methodology of the sector impacts generally the data of at least one additional sector. Consequently, the frequent changes thus affect the complete accounting system of the national economy, i.e. if changes are not tracked back, the temporal comparability of the national account statistical indicators of the other sectors is reduced in the European Union.