Hungary: Reorientation Back to HGBs Issuance

Bond

Summary:

Hungary's government plans to further tighten the fiscal deficit; however, fiscal risk remains to the upside due to the political cycle. The debt agency focus is shifting to Hungary government bonds (HGBs), and we will see less retail and FX issuance this year. Average debt maturity should increase with concentration at the long end of the curve.

Fiscal policy: Efforts to consolidate while the election campaign began

According to preliminary finance ministry numbers, public finances ended last year in deficit at 4.8% of GDP against a plan of 4.5% and down sharply from 2023's 6.7% of GDP. For next year, the planned government accrual deficit target remains at 3.7% and the cash flow deficit at 4.8% of GDP. The expected slippage is 0.3-0.5% of GDP, mainly due to our different macroeconomic outlook, but we see this as a manageable risk. The main issue, however, is the start of the election campaign this year, which brings the traditional fiscal upside risk.

Hungary: Reorientation Back to HGBs Issuance_1

Gross financing needs and HGBs issuance (HUFbn)

Local issuance: More HGBs, less retail bonds

AKK, the government debt agency, unveiled a funding plan for this year in December, indicating a change in strategy with a greater focus on HGBs as the main source of funding and less reliance on FX and retail issuance compared to last year. Given the higher fiscal deficit in our forecast compared to the MinFin plan, we also expect HUF450bn higher gross borrowing needs compared to the AKK plan, fully covered by HGBs issuance.

Overall, we see gross borrowing needs rising from HUF11,847bn to HUF13,288bn (+14% YoY, 15.1% of GDP), mainly due to higher redemptions this year. We expect gross HGBs issuance (incl. switches) to rise from HUF3,531bn to HUF5,192bn (+47%). Net issuance is also expected to increase after three years of decline from HUF2,104bn last year to HUF2,871bn (+37%).

In our view, AKK is trying to match the high local demand supported by tax incentives and lower holdings relative to CEE peers and high redemptions of retail bonds this year, which likely can be directed to the HGB market. AKK issued fewer retail bonds last year and more HGBs than originally planned, confirming the intention for this year. At the same time, AKK will look to extend its average debt maturity (5.8y as of end-24), and the increase in HGBs issuance compared to last year should be mainly in the 10y segment. Given higher retail bond redemptions in 1Q25 and fiscal risk, we can expect AKK to look to frontload supply early in the year if demand remains strong.

Hungary: Reorientation Back to HGBs Issuance_2

FX issuance: Lower supply a clear positive

In line with the AKK issuance plan, Hungary came quickly out of the gate this year with a €2.5bn deal across conventional (€1.5bn in 10-year paper) and green bonds (€1bn in 15-year paper). This completes the country’s planned USD and EUR international bond issuance for the year, with AKK CEO Kurali’s comments recently confirming that no more major Eurobond sales are expected.

There are plans for a few smaller alternative funding sources to make up the remainder (FX issuance in the funding plan totals €3.4bn), with €200-300mn equivalent in (renminbi) Panda bonds seen in the second half of the year, while “foreign currency denominated project loans and other types of FX financing (e.g. Euro Commercial Paper) depending on circumstances are also options in 2025.”

Hungary: Reorientation Back to HGBs Issuance_3

Hungary EUR & USD international sovereign bond issuance (USD equivalent)

The frontloading of planned FX issuance needs is a clear positive for Hungary relative to peers such as Romania and Poland, which should act as a technical tailwind, in particular with net Eurobond issuance in USD and EUR even lower, set to be around the equivalent of €1.1bn. At the same time, the credibility of plans to continue lowering gross Eurobond issuance (relative to $7bn in 2023 and $4bn in 2024) is high given the current share of FX debt within government debt is nearing the government’s 30% limit.

Any fiscal slippage is likely to be funded on the local market, and further Eurobond issuance is unlikely, at least until later in the year, when the window for 2026 pre-financing is nearer.

Hungary: Reorientation Back to HGBs Issuance_4

Hungary – FX share within government debt

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Warren Takunda

Economic

Stocks

London stocks fell in early trade on Monday as investors eyed a busy week that includes rate announcements from the US Federal Reserve and the European Central Bank, and earnings from more than half the ‘Magnificent 7’.

At 0840 GMT, the FTSE 100 was down 0.4% at 8,469.17.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "There’s a lot riding on this week’s earnings reports for big tech, with updates due from Meta, Microsoft, Apple and Tesla. There’s a lot of upside already sewn into expectations, which leaves plenty of room for disappointment. The S&P 500 is set to start the week with a case of the jitters, as investors assess the threat from Chinese AI startups.

"The small Chinese research and engineering firm DeepSeek’s AI Chatbot has proved so popular it jumped into the top spot on US iOS App, usurping Open AI’s ChatGPT. DeepSeek threatens to spook big tech and has already sent shivers through Silicon Valley by releasing details about how to build large language models more cheaply using low-cost Chinese chips. While they don’t offer the cutting-edge tech of Nvidia’s graphics processing units, the efficacy of the budget version and the willingness of DeepSeek to share its know-how may start to chip away at Nvidia’s dominance. DeepSeek has access to deep wells of Chinese data and has deep pockets. It’s funded by hedge fund manager Liang Wenfeng and is believed to be on the hunt for the best AI talent.

"While Nvidia's latest chips are still far superior in terms of performance, with cheaper rivals making progress, there is likely to be a knock-on effect globally, with competing US and Chinese spheres of AI influence set to emerge."

In UK equity markets, miners retreated after weak Chinese manufacturing data, with Anglo American, Glencore and Antofagasta all weaker.

Dr Martens edged lower even as the iconic boot maker backed its full-year guidance and reported an uptick in revenue thanks to a solid performance from the ecommerce segment.

On the upside, British American Tobacco was the standout gainer on the FTSE 100 after an upgrade to ‘buy’ at UBS.

WH Smith rallied as it confirmed it was looking at potential strategic options for its high street stores, including a possible sale of the "profitable and cash-generative" unit.

The company said it had become a "focused global travel retailer" over the past decade. Its travel business now has more than 1,200 stores across 32 countries, providing three-quarters of group revenue and 85% of trading profit.

Diversified Energy advanced as it announced the acquisition of Maverick Natural Resources for $1.28bn. It said the deal would strengthen its position in multiple basins, including the Permian and Western Anadarko.

Source: Sharecast

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Warren Takunda

Economic

World shares were mostly lower on Monday after U.S. stocks edged back from their all-time high, with many Asian markets closed for holidays.

In early European trading, Germany’s DAX dropped 1.1% to 21,178.37, while the CAC 40 in Paris shed 0.8% to 7,863.70. Britain’s FTSE 100 declined 0.3% to 8,473.33.

The future for the S&P 500 sank 1.6% while that for the Dow Jones Industrial Average declined 0.9%.

Updates on a Chinese artificial intelligence startup, DeepSeek, pushed shares in Hong Kong higher. The open version of the AI reasoning-based model appears to require far less investment than other AI models, causing investors to sell technology shares in the U.S. and Japan and to buy Chinese tech companies.

Hong Kong’s Hang Seng gained 0.7% to 20,197.77, with shares in e-commerce giant Alibaba gaining 2.9% while search enging company Baidu jumped 4.9%.

The Shanghai Composite index fell, however, after a survey of manufacturers showed export orders in China dropping to a five-month low. It edged 0.1% lower to 3,250.60.

The official manufacturing purchasing managers index fell to 49.1 in January from 50.1 in December, slipping into contractionary territory on a scale where 50 and above indicates expansion. New orders and construction PMIs also fell.

Zichun Huang of Capital Economics said the slowdown might be temporary given increased government spending. Also, many factories close for a time during January, ahead of the Lunar New Year holidays, which begin on Tuesday.

“But the disappointing PMI data underscores the difficulty policymakers face in achieving a sustained recovery in growth,” Huang wrote in a commentary.

Tokyo’s Nikkei 225 gave up 0.9% to 39,565.80, extending losses after the Bank of Japan raised its benchmark interest rate to 0.25%, its highest level since 2008.

Computer chip-related shares saw big declines, with Tokyo Electron down 4.9% and test equipment maker Advantest sinking 8.6%.

The U.S. dollar was steady against the Japanese yen, at 155.45 yen, down from 155.72. The euro slipped to $1.0477 from $1.0483.

In Bangkok, the SET fell 0.7%.

Trading was closed in many other Asian markets due to holidays.

On Friday, U.S. stocks pulled back from their all-time high to close out a second straight winning week.

The S&P 500 slipped 0.3% a day after setting a record, closing at 6,101.24. The Dow Jones Industrial Average dipped 0.3% and the Nasdaq composite sank 0.5%.

Trading was quiet, aided by relative steadiness in the bond market, which has been driving much of the action on Wall Street lately. When worries about inflation and the U.S. government’s swelling debt have been on the rise, Treasury yields have climbed and helped knock down stock prices. When concerns ebb, such as after last week’s encouraging update on inflation, yields have eased and helped stocks rise.

A mostly encouraging start to the earnings reporting season for big U.S. companies has also helped prop up the stock market. Even if higher Treasury yields are pushing downward on their stock prices, companies can make up for it by delivering bigger profits.

The yield on the 10-year Treasury eased to 4.61% from 4.65% late Thursday. Other yields also pulled lower following a couple reports on the U.S. economy that came in worse than expected.

One said U.S. consumer sentiment is weaker than economists had forecast and fell in January for the first time in six months. A separate preliminary report suggested U.S. business activity is also weaker than expected. A third, potentially more encouraging report said sales of previously occupied homes were slightly stronger last month than expected, following the weakest year for such sales since 1995.

Traders don’t expect the weak data to push the Federal Reserve to cut its main interest rate at its meeting next week. They’re virtually certain the central bank will hold steady, according to data from CME Group.

In other dealings early Monday, U.S. benchmark crude oil shed 25 cents to $74.41 per barrel. Brent crude, the international standard, lost 29 cents to $77.26.

Source: AP

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ING

Economic

Fiscal policy: The election year should not interrupt the consolidation

According to our estimates, the government ended last year with a deficit of 2.5% of GDP, the first year fully affected by the consolidation package introduced earlier, and also hit by the flood costs. For this year, the government approved the budget in December, and we maintain our usual positive bias on the Ministry of Finance's plan for the Czech public finances with a forecast of a 2.0% of GDP deficit. Although the September general election increases the risk of higher spending, historically any changes before elections have fit within approved budgets.

Czech Republic: Slightly Higher Supply Despite Continued Consolidation_1

Gross financing needs and CZGBs issuance (CZKbn)

Local issuance: Slightly more government bonds but also EUR-issuance

Although the government continues its consolidation efforts this year and the deficit continues to narrow, higher redemptions will lift gross borrowing needs compared to last year. We expect an increase in borrowings from CZK530.7bn to CZK557.5bn (+5% YoY, 6.6% of GDP). Gross issuance of Czech government bonds (CZGBs) will rise slightly from CZK376.0bn to CZK416.2bn (+11%), but higher redemptions will keep net supply flat at CZK202.0bn. The Ministry of Finance is looking to develop the EUR-denominated CZGBs market under local law for future nuclear power expansion financing. Therefore, we are likely to see more issuance of these bonds this year, including a refinancing of EUR-denominated T-bills from last year. At the same time, the Ministry of Finance has the European Investment Bank's facilities, which could push down our estimate of the supply of CZGBs if the Ministry of Finance decides to use them fully, depending on market conditions.

Given the comfortable supply and high demand, the Ministry of Finance extended the average maturity last year with the average issuance maturity of 10 years (average maturity of 6.3 years by end-2024). This year we can expect a similar issuance pattern focusing on the long end of the curve in the 2034-35 and 2038-39 segments. The risk towards higher issuance of CZGBs is the possibility of prefinancing next year through switches in the secondary market, where the Ministry of Finance increased activity and sold about CZK41bn, mainly at the end of last year.

Czech Republic: Slightly Higher Supply Despite Continued Consolidation_2

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Bond

Fiscal policy: Lower deficit but all eyes on the presidential election

Public finances by our estimates ended last year with a deficit of 6.1% of GDP, the highest since the Covid-impacted 2020. For this year, we expect the deficit to narrow only slightly to 5.5% of GDP. While last year fiscal risks were to the upside, we see them as more balanced this year. However, we have to keep in mind the May presidential election which can change the picture either way due to the election campaign and the resulting impact on the political environment.

Poland: Year Two of Record Bond Issuance_1

Gross financing needs and POLGBs issuance (PLNbn)

Local issuance: Less government bonds but much more diversification

Last year saw historical record bond issuance and this year will not be much different. We see gross borrowing needs rising by 7.5% from PLN500.3bn to PLN538bn (13.7% of GDP). Polish government bonds (POLGBs) should remain the main source of funding, but given wider diversification supply should fall slightly from last year. We forecast a decline in gross POLGBs issuance from PLN290.0bn to PLN246.4bn (-15%), assuming the Ministry of Finance uses other sources of funding. This includes PLN45.7bn of T-bills, the first issuance since the Covid-impacted 2020. At the same time, the plan includes high FX issuance, smooth flow of EU money and a cash buffer drawdown. Retail bonds are also expected to remain an important source of funding, marking a record strong 2024. Overall, this year's funding will thus be significantly diversified but the resulting split will depend mainly on market demand given saturated local demand and muted foreign investors in the POLGBs market.

The Ministry of Finance will look to extend the average maturity of the POLGBs portfolio (4.3 years to end-2024), which is currently the shortest among CEE peers. However, local demand is focused on the short end and the belly of the curve, which may further amplify T-bill issuance. On the other hand, the redemption calendar is very heavy in the near term peaking in 2029 (PLN216bn), while the later years are very low. This will complicate any reduction in the supply of POLGBs in the coming years, despite the possible consolidation of public finances.

Poland: Year Two of Record Bond Issuance_2

Gross financing needs and POLGBs issuance (PLNbn)

FX issuance: Big numbers expected again

With only modest fiscal consolidation likely in 2025, we expect Eurobond issuance at a similar level to last year, in the range of €15-16bn. In this context, the government has made a solid start to the year with a €3bn deal in the first week of January. There have been comments about potential international bond issuance in the first quarter for state development bank BGK as well, with quasi-sovereign paper likely to keep investors active this year.

Poland: Year Two of Record Bond Issuance_3

Poland EUR and USD international sovereign bond issuance (USD equivalent)

Maturing sovereign debt is slightly lower this year compared to 2024 (€5.5bn vs €7bn), meaning net supply will likely be higher in 2025, but should continue to see solid demand given robust fundamentals outside of relatively loose fiscal policy. With no USD maturities, we expect supply to be more skewed towards EUR, also compounded by previous comments from the government that the USD market is starting to look less attractive for the issuer. Having said this, we expect the use of a diverse range of funding options will continue given the large issuance needs, with deals likely in USD, along with a green bond and Samurai (JPY) deal.

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Economic

Fiscal policy: further narrowing of the budget deficit

The government likely plans to narrow the budget deficit in 2025 (implying a negative impulse) by reducing the contribution of personnel and social security spending by keeping wage increases below actual inflation, and by raising tax revenues, which largely depend on the deflator.

However, even with reduced earthquake-related spending, it will be difficult for the government to achieve the 3.1% of GDP budget deficit target (versus the primary budget on balance). This is due to the challenges in implementing significant expenditure cuts given the relatively inflexible nature of government spending and the impact of an economic slowdown on tax revenue generation. Consequently, we anticipate budget and primary deficits of 3.4% and 0.2%, respectively.

Turkey: More Reliance on Local Funding_1

Gross financing needs and TURKGBs issuance (TRYbn)

Local issuance: nominal figures increase again, but remain stable in relative terms

Given inflation and the rapidly rising debt service, we expect a massive increase in gross borrowing needs this year despite a narrower fiscal deficit than last year. Our forecast shows a 33% increase in needs, from TRY2,494bn to TRY3,313bn. However, in terms of GDP, they decrease slightly from 5.9% to 5.8%, aligning with the five-year average.

MinFin is further increasing its reliance on local funding and in particular on TURKGBs. This is our assumption for this year as we believe that TURKGBs (including 1y T-bills) will cover about 73% of all borrowing needs. At the same time, TURKGBs issuance should cover any deviations from the budget plan, which is reflected in our forecast versus MinFin. Thus, gross TURKGBs issuance should increase by 40% from TRY1725bn to TRY2418bn.

We expect MinFin to continue to increase the average maturity of TURKGBs from last year's 3.9y, or at least keep the same level, and focus on issuances in the 5-10y segment. Given the upcoming CBT rate cuts and maturities concentrated mainly in the second and third quarters, we can expect the supply of TUKGBs to concentrate mainly in the middle of the year and beyond.

Turkey: More Reliance on Local Funding_2

Financing needs for 2025 (TRYbn)

FX issuance: focus on refinancing

Turkey is expected to have another active year in the primary market, with the sovereign likely to follow the lead of recent corporate and financial issuers to start the year.

The government has indicated plans for $11bn in gross issuance, which suggests that net supply will be slightly negative due to significant upcoming maturities. This relatively supportive technical picture, combined with the ongoing improvement in fundamentals, should help to keep spreads well anchored over the coming years.

We expect both conventional and sukuk issuance in the USD space, along with the potential for more EUR paper as well.

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Bond

Foreign bondholders: Gradual outflow of foreigners and more reliance on domestic demand

If 2023 was a good year for foreign inflows into local currency bond markets in the CEE region, 2024 and especially the second half saw a turn with outflows across the region. No doubt local fiscal issues and a negative global environment are not supportive for the region and we are unlikely to see a different picture this year. Within CEE4, only in the case of Czech government bonds (CZGBs) do we see that foreign inflows can keep pace with domestic demand and if we ignore the methodological one-off in the Czech data, CZGBs is the only market that shows a relative increase in foreign bondholders year-on-year.

On the other hand, Romania and Poland saw stable foreign holdings leading to a deterioration in relative terms late last year. Hungary has seen foreign outflows since the middle of last year and has lost the most among CEE peers. We believe that with still-high borrowing needs, heavy issuance and limited room for rate cuts, it will become more and more difficult to attract foreign demand. Governments will have to rely on local demand, which in some cases seems already saturated after last year.

In Turkey, foreign bondholders reached 10% in November and December versus 2% in January 2024. We expect inflows to continue due to the yield level and rate cuts story along with favourable technicals. The weighting of Turkish government bonds (TURKGBs) in the GBI-EM index is gradually increasing from a 0.75% bottom to the current 1.50%. We believe the weighting will continue to increase which should support further inflows into the TURKGBs market.

Foreign bondholders (%)

Sovereign ratings: Positive on Turkey, negative on Hungary and Romania

In the past year we have seen several rating changes in both directions across the region. For this year, we are particularly positive on Turkey, where further normalisation of the policy and economic environment could bring another rating upgrade in the second half of 2025. We are neutral on Poland and the Czech Republic, where we expect relative metrics to stabilise versus peers. We are negative on Hungary and Romania given rating agencies' sensitivity to political uncertainty and deterioration in fiscal metrics.

In Poland (A2/A-/A-), the sovereign rating and outlook seems the most stable in the CEE region and so far there are no indications of any changes. Agencies typically cite the lack of efforts to consolidate public finances as the main risk to the rating. On the other hand, Poland unlocked EU money last year and outperforms peers in GDP growth-stabilising relative metrics. Overall, we thus see the risk of some change in either direction as low for this year.

In the Czech Republic (Aa3/AA-/AA-), Fitch upgraded the outlook from negative to stable in the past year, as have the other agencies, which likely exhausts the scope for any changes. We do not see any changes in the top-rated country in the CEE region this year.

CEE Bond Technicals: Foreign Bondholders and Sovereign Ratings_2

In Hungary (Baa2/BBB-/BBB), Moody’s downgraded the outlook from stable to negative last November, mainly due to the loss of some EU money, weaker-than-expected growth and limited impact of FDI inflows on the economy. In contrast, Fitch upgraded the outlook to stable from negative in December due to the bullish outlook on the economy in the coming years. For now, we do not see further changes in the near term but risks point to the downside. Another weaker year for the economy along with the political cycle and EU money discussions may lead to further negative moves from the rating agencies in our view.

In Romania (Baa3/BBB-/BBB-), Fitch revised the country's outlook to negative from stable in December last year following a failed fiscal consolidation and political uncertainty resulting from the general and presidential elections. Fitch reaffirmed Romania's abilities to react the quickest to adverse developments in the CEE region. We thus see further ratings reviews by other agencies this year resulting in potential negative outlooks. Romania will have to meet the European Commission consolidation criteria this year to avoid further negative actions by the rating agencies.

In Turkey (B1/BB-/BB-), in the past year we have seen rating improvements from all three major agencies. Moody’s upgraded by two notches with a positive outlook in July. S&P upgraded the rating by one notch each time in May and November. Fitch upgraded the rating in two steps in April and September. The agencies' reports mention falling inflation, strengthening lira credibility and reduced FX exposure. We expect the rating upgrades may continue in the second half of this year, in particular with regards to Moody's catching up with S&P and Fitch.

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