Giant loan from China: the most important puzzle is still missing

On Thursday, it was revealed that the state had quietly increased the Hungarian foreign currency debt by one billion euros, and at the current exchange rate, it had taken a loan from Chinese banks equivalent to HUF 393 billion. The deal didn’t happen now, but back in April.

Contrary to his custom, no announcement was made about borrowing, only the statistics of the State Debt Management Center indicate it, there the Portfolio noticed on Thursday.

Not all details are known about the loan, only that:

• the amount is one billion euros, the order of magnitude is not small, it can be estimated at 0.4-0.5 percent of the Hungarian GDP
• the interest rate varies
• must be repaid in April 2027.

Until now, bond issuance was the norm

In recent years, the state preferred to issue bonds if it wanted to obtain funds in foreign currency (dollars, euros, yuan). This was also the case at the beginning of 2024, when it was issued with multiple oversubscriptions worth $2.5 billion bonds Hungary for 12 years, with an annual yield of 5.74 percent. The issue was made at a premium of 1.8 percentage points over the yield of the benchmark US government bond.

Now the events took place quite differently, there is no announcement and the communication regarding the details is restrained. Available data according to the foreign currency debt, the foreign loan portfolio jumped from HUF 2,795 billion at the end of March to HUF 3,152 billion by the end of April. However, the change does not amount to one billion euros, but the announcement of the ÁKK makes it clear:

The ÁKK sent Portfolio the answer that with the transaction the foreign currency ratio of the public debt is within the limit, It remained at 28.9 percent. It was also clarified that the loan was disbursed by the China Development Bank, the Export-Import Bank of China and the Hungarian branch of Bank of China Limited, and infrastructure and energy developments can be financed from the amount.

The most important detail is missing

Equilor’s senior analyst Zoltán Varga told Economx that the borrowing was not completely transparent, in the sense that the most important information, the interest rate, was missing. We do not know the repayment schedule or the further details of the variable interest rate. He added that this deal would significantly limit the issuance of foreign currency bonds in the second half of the year, but based on previous communications, the state did not plan to do so for the July-December period anyway, as the ÁKK wrote a few weeks ago:

there are no further significant euro and dollar public currency bond issues in the 2024 financing plan.

Maybe the money was needed for the airport

The one billion euros raised in April could have been partially or even fully used by the state for the purchase of Budapest Airport, this can be inferred based on the timing, said Zoltán Varga. The state paid 2.5 billion euros for 80 percent of the airport.

It cannot be ruled out that the news of the loan will eventually affect the forint exchange rate, but according to Equilor’s expert, the focus may now be on the following:

• Lukoil case : the spokesperson of the European Commission told Reuters that there is no three-day deadline that would bind the committee, they are currently investigating and no decision has been made yet.
• The European Commission has published its country report : several criticisms were made in the document, noting that the activities of the Anti-Corruption Working Group have not yet yielded any tangible results; the legislative environment changes too often, and increasing state intervention is a problem for companies

We also looked for the ÁKK, but compared to before, they did not give us any details. It was not revealed, for example, what the starting interest rate is and what the reference interest rate is, based on which the cost of the loan will be formed until 2027.