The Hungarian Government Securities Market: Overview and Recent Developments. Laszlo Buzas,, Deputy CEO

Transcription

1 The Hungarian Government Securities Market: Overview and Recent Developments Laszlo Buzas,, Deputy CEO Presentation for the Turkish Treasury, March 2,

2 DEBT OF THE CENTRAL GOVERNMENT The public debt/ GDP ratio decreased significantly between , and has slightly increased since 2002 reaching 58.4% in 2005 (ESA-95) Non-marketable debt has been replaced by marketable instruments. Public Debt as a Percentage of GDP % 80% 70% 60% Maastricht criterion 50% 40% 30% 20% 10% 0% p Marketable Non Marketable Foreign currency

3 GOVERMENT DEBT IN INTERNATIONAL COMPARISON 120% 100% 80% 60% 40% 20% 0% Belgium Czech Republic Denmark Germany Estonia Greece Spain France Ireland Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Slovenia Slovakia Finland Sweden United Kingdom Government Debt in the Eurozone is EUR billion, or 70.8% of GDP Government Debt in EU-25 is EUR billion, or 63.3% of GDP Public P u b Debt D t as a Percentage P e of o f GDP G D P in the e EU- E U

4 THE DOMESTIC BOND MARKET Hungarian government debt equals to 0,7% of EU-25 debt. The domestic bond market size is small in international comparison, but is significant in a regional aspect Problem: too small benchmark sizes result in too many bond series Bond Market size (EUR billion) Benchmark Size (EUR Billion) Mrd EUR Spain Slovakia Portugal Poland Netherlands Italy Ireland Hungary Greece Germany France Mrd EUR Spain Slovakia Portugal Poland Netherlands Italy Ireland Hungary Greece Germany France 0,9 1, Finland Czech Republic Finland Czech Republic 1,5 5,6 Belgium 263 Belgium 16 Austria 146 Austria 8,8

5 THE PRIMARY MARKET The yield-curve runs from 3 months to 15 years (3, 6 and 12 month T-Bills, 3, 5, 10 and 15 year Bonds. Domestic bonds and T-bills are sold at pre-announced auctions, where only Primary dealers may take part (89% of primary sales) In 2006 gross issuance will reach EUR 27 billion (85% domestic, 15% international) Net issuance will be approximately 4.6 EUR billion Gross Issuance in 2006 Domestic Bond Issuance in 2006 T-Bills 59% 3 year 42% 15 year 6% 10 year 23% HUF loans 3% HUF bonds 23% Foreign currency loans 1% Foreign currency bonds 14% 5 year 29%

6 THE SECONDARY MARKET Vicious circle: due to the illiquid the secondary market, investors can buy large ticket at auctions and the frequency of auctions adds to the illiquidity of the secondary market. OTC trading takes place on Reuters dealing, Bloomberg and by phone Problem: the lack of a transparent electronic trading system Hungarian Government Bonds: Secondary Market Turnover HUF billions Q1 Q2 Q3 Q4

7 CREDIT RATINGS AND SPREADS One of the major advantages of the convergence process in the current EMU-members was the rapid decrease of spreads in the longer end of the yield-curve In the domestic market Hungary is considered to be an Emerging market and the spreads required by investors reflect this status Though Hungary is better rated than Poland, foreign investors require a higher premium Rating History CEE Yield-curves and the Bund (June 8, 2006) Investment grade since Until 2002 annual upgrades. 8,00 7,00 6,00 Local Currency Ratings are A1/A-/A- (Moody s /S&P/Fitch) Outlook: Negative/Negative/Stable % 5,00 4,00 3,00 Foreign Currency Ratings A1/A-/BBB+ (Moody s /S&P/Fitch) Outlook: Negative/Negative/Stable 2,00 1,00 0,00 3 mo 6 mo 12 mo 3 yrs 5 yrs 10 yrs 15 yrs Bund Czech Polish Hungarian

8 FOREIGNERS IN THE HUNGARIAN MARKET Foreigners are the biggest investor group holding 29 per cent of the HUF denominated government debt (bonds and T-bills),In the bond market their share reaches 40% External debt (i.e. foreign currency debt plus domestic currency debt held by foreigners) makes up between 46-49% of the Hungarian public debt Two factors: national traditions (France, Spain) and benchmark status 3000 Foreign Holding of Hungarian Government Securities 100% Ownership of Government Bonds by Residence of Ownership of Government Bonds by Residency of Investors Investors 2003 (2003) 90% % 70% % 50% HUF billion % 30% 20% 10% 0% Q12006 Austria Portugal Netherlands Ireland Finland Lithuania Greece Belgium Italy Poland Resident France Hungary Spain Ciprus Non-resident Czech Republic Slovakia Latvia Slovenia Malta

9 RECENT DEVELOPMENTS In August 2000 AKK worked out an implementation plan that had the objective to prepare the domestic market for Eurozone membership by the year The plan included both market harmonisation and development measures, most of which had been implemented by early On March 1, 2001 AKK became a company limited by shares, 100% owned by the government. In July 2003 AKK proposed introducing further steps (e.g. introduction of price quotation instead of yield quotation, change in the benchmark fixing, implementation of an electronic trading system) that were unanimously rejected by the Primary dealers quoting inappropriate market conditions. A modification of the Law on Public Finances in 2003 assigned the task of the liquidity management to AKK. Hungary joined the European Union on May 1, AKK opened up the Primary dealer system by allowing non-resident institutions to become a remote PD. Based on a new benchmark model AKK worked out a new medium-term debt management strategy and a set of benchmarks that capture both domestic and foreign currency debt.

10 BENEFITS OF THE EU-MEMBERSHIP Participation in the single market should enhance trade and encourage investment, including continued inflows of FDI Opening up a new investor base The potential for net transfers from the European Union Improved risk perception and ratings Estonia Hungary Czech Republ ic Slovaki a Sloveni a Latvia Lithuani a Poland The convergence process also adds special risks: Increased competition Increased currency volatility due to the heavy capital inflows/outflows Risk of non-compliance with the Maasticht criteria Loss of traditional investors Loss of benchmark status Need to get prepared: harmonisation and market development

11 MARKET HARMONISATION The goal: to create a competitive, efficient and EMU-compatible government bond market based on the best practices of the peer EMU-member countries makes comparison of different products in different markets easier Investors feel comfortable if they can use customized market conventions Coupon frequency Yield/price calculations/day counts Price quotation instead of yield quotation Settlement cycle (T + 2), unificatin of settlement dates Business days (TARGET) Redenomination

12 MARKET DEVELOPMENT Primary Market More standardized products Creation of real benchmarks Less bond series 6-7 per year, larger amounts Lengthening of the yield-curve Liberalisation of capital movements Widening of the investor base Non-resident (remote) Primary Dealership since May 1, 2004 Secondary market Obligation of the Primary Dealers: to make markets in larger amounts at tighter spreads Change in the benchmark fixing system Buy-backs/Exchange auctions Securities Lending Repo (both standing and liquidity) facility Electronic trading platform

13 RECENT CHANGE IN THE STRATEGY Public debt management is governed by the approved strategy, benchmarks and the annual financing plan Between1999and 2003 the strategy resulted in a decrease of the share of foreign currency debt From 2004 the new strategy aims at keeping foreign currency debt at 25-32% The Influence of the Strategy on Foreign Borrowing EUR Millions F Gross redemptions Gross issua nce Ne t issua nce

14 CHANGE IN THE BENCHMARKS Benchmarks are portfolios that incorporate the long-term cost and risk preferences Benchmarks are approved by the Minister of Finance General Benchmarks Currency Structure: HUF 68-75% - foreign currency 25-32% Liquidity benchmark:a target band around the optimal end-day balance of the Single Treasury Account HUF Portfolio Duration: 2,5 years +/- 0,5 years Interest rate: Fixed 61-83% Floating17-39% Foreign Currency Portfolio Currency composition: Euro 100% Fix-floating mix: 66%-34% The Foreign Currency Portfolio by Original Currencies (2005) USD 16% GBP 10% JPY 8% EUR 66%

15 LIQUIDITY MANAGEMENT The challenge is that the budgetary processes traditionally show significant volatility within the month. In recent years seasonality appeared in the annual budget as well The short-term objective is to keep the end-day balance of the Treasury Single Account (TSA) at pre-defined levels (in a band around the optimal level ) Medium-term objective: to reduce the end-day balance of the TSA The necessary instruments (e.g repo) were also approved T-Bills Liquidity T-Bills Repo (both standing and liquidity) Buybacks/Exchange auctions Stand-by loan Timing of foreign currency issues

16 T-BILLS IN LIQUIDITY MANAGEMENT T-Bills (tenor 3, 6 and 12 months) are auctioned on the basis of a pre-announced issuance calendar (inflexibility) The amounts announced for auction my vary in line with the financing requirements within the given year (flexibility) Traditionally T-Bills serve not only as a liquidity management tool but also as a financing financing instrument (inflexibility) Liquidity T-Bills Introduced in 2004 Reopening of an existing 3-month T-Bill with a 6-7 weeks remaining maturity Auctions held on Monday with T+2 settlement 15 Liquidity T-Bill auctions in 2005 (versus 17 in 2004) Total amount of HUF 455 bn raised (HUF 388 bn in 2004) i.e. approximately HUF 30 billion per auction

17 DEVELOPMENT OF THE REPO-MARKET Standing repo facility The objective is to help secondary market making and/or settlement Legal Back-ground: the European Master Agreement Eligible counterparty: only Primary dealers Daily and general lines for counterparty exposure Limitation also on the securities side Liquidity repo facility Major objective: to place excess cash reserves in the market Eligible counterparty: originally Primary dealers, then resident financial institutions, now the possibility is open to non-residents as well 197 auctions in 2005: 63% active repo operations, 37% passive (reverse) repo Turnover grew from HUF 2209 bn in 2004 to HUF 4326 bn in 2005 Tenor: one day (T/N, S/N) and one week (overnight is possible) Further development is possible if trading portfolios grow.

18 OTHER INSTRUMENTS Buybacks The major objective is to smoothen the refinancing risk Liquidity management is only a secondary function Takes the form of a reverse auction Eligible counterparty: only Primary dealers Its significance will grow with the larger benchmark sizes No exchange auctions yet Stand-by loan facility Short-term syndicated revolving loan facility Created in 2003 for one year with the possibility to roll over in 2004 and 2005 Original objective to bridge gaps between payment and receipt of foreign currency funds (i.e. from ant to the European Union) Secondary function is to help general liquidity management Timing of foreign currency issues Usually in the first half of the year

19 Thank you for your attention! Presentation for the Turkish Treasury, March 2,