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Assessing the Sensitivity of Hungarian Debt Sustainability to Macroeconomic Shocks under Two Fiscal Policy Reactions

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  • Pierre Beynet
  • Edouard Paviot
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    Abstract

    Hungarian debt level has steadily increased since 2001, with the debt-to-GDP ratio reaching about 84% at end-2011. This high level combined with significant volatility of macroeconomic variable influencing potential future debt paths – GDP growth, exchange rate and interest spreads – put Hungarian debt sustainability at risk. To assess debt sustainability over a 5-year horizon, a stochastic debt simulation has been conducted by applying random shocks derived from historical volatility to a baseline scenario. These simulations are used to derive fan charts showing the distribution probability of debt under different sets of assumptions regarding i) the nature of shocks – temporary or permanent – and ii) fiscal policy reactions, i.e. either allowing automatic stabilizers to operate or not. Results indicate that the probability of a debt ratio going beyond 90% of GDP in the next five years – a level beyond which debt is likely to hurt growth – is non-negligible (at least 25% in the most favourable scenario), especially if volatility turns out to be higher than observed in the past. The main risks to debt sustainability lie in growth shocks, whose volatility is high in Hungary. This highlights the crucial role of growth for debt sustainability. The impact of exchange rate depreciation can also be important, especially if shocks are permanent, while the rise in interest spreads would have a much more limited impact as debt is only progressively rolled over. Finally, fiscal policy reaction matters. Offsetting the impact of automatic stabilizers significantly reduces the width of potential debt paths over the five-year horizons. Évaluer la sensibilité de la viabilité de la dette publique hongroise aux chocs macroéconomiques selon de deux réactions de politique budgétaire La dette de la Hongrie n’a cessé de s’accroître depuis 2001 et le ratio de dette sur PIB a atteint environ 84 % fin 2011. Ce niveau élevé, conjugué à la grande volatilité de variables macroéconomiques influant sur les profils possibles d’évolution de la dette à l’avenir – croissance du PIB, taux de change et écarts de taux d’intérêt – hypothèquent la viabilité de la dette publique hongroise. Pour évaluer la viabilité de la dette sur un horizon de cinq ans, une simulation stochastique a été effectuée, dans laquelle des chocs aléatoires basés sur la volatilité historique de la dette ont été appliqués à un scénario de référence. À partir de ces simulations, des graphiques ont été construits en éventail illustrant les évolutions probables de la dette en fonction de différentes hypothèses relatives i) à la nature des chocs – temporaires ou permanents – et ii) à la réaction de la politique budgétaire, à savoir, laisser ou non opérer les stabilisateurs automatiques. Les résultats font apparaître une probabilité non négligeable (d’au moins 25 % dans le scénario le plus favorable) que le ratio dette/PIB dépasse 90% – niveau au-delà duquel l’endettement risque d’entraver la croissance – d’ici cinq ans, surtout si les paramètres étudiés se révèlent plus instables encore que par le passé. Les principaux risques qui pèsent sur la viabilité de la dette résident dans l’évolution de la croissance, laquelle affiche une forte volatilité en Hongrie. Il apparaît donc que la croissance joue un rôle déterminant dans la viabilité de la dette. L’incidence d’une dépréciation du taux de change peut également être importante, notamment si ce choc est permanent, alors que l’augmentation des écarts de taux d’intérêt aurait un effet bien moindre, du fait du refinancement progressif de la dette. Enfin, la réaction de la politique budgétaire a, elle aussi, son importance. En compensant l’impact des stabilisateurs automatiques, on réduit sensiblement l’éventail des trajectoires envisageables de la dette sur un horizon de cinq ans.

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    Bibliographic Info

    Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 946.

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    Date of creation: 09 Mar 2012
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    Handle: RePEc:oec:ecoaaa:946-en

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    Keywords: Hungary; fiscal reaction function; public debt sustainability; fan charts; risk analysis; Hongrie; viabilité de la dette publique; analyse de risques; graphiques en éventail; fonctions de réaction budgétaires;

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