Potentials and limitations of non-governmental forintdenominated bond issues by non-residents

This article deals with forint bonds issued by non-residents. We present the role of such bonds in financing the external debt in the domestic currency, as well as the typical cash flows associated with their issue and the related interest rate swaps. By buying so-called euroforint bonds issued by highly rated, generally supranational organisations foreign investors take the exchange rate risk of the external debt, while the domestic banking system obtains long-term forint financing at a fixed interest rate. Over the past 10–15 years, the Eurobond market has largely contributed to the ability of New Zealand and South Africa to finance their balance of payments deficit, while eliminating the need to burden domestic actors with the inherent exchange rate risk. However, in the case of the forint the market of this instrument has remained relatively immature. In the second part of the article, we examine how and why South Africa and New Zealand have been able to successfully tap the Eurobond market, and what conditions should precede such an upswing in euroforint issues. We conclude that the euroforint bond market has remained immature primarily due to the inability of Hungarian banks, characterised by constrained foreign exchange liquidity, to satisfy the foreign currency financing needs of bond issuers through interest swaps, and consequently, they are also unable to draw on their fixed interest forint funds. This can be attributed to the fact that in previous years Hungarian banks financed a part of their FX loans by local currency deposits, and – seeking to hedge their exchange rate exposure – they buy foreign currencies and offer forint on the FX swap market. While euroforint bonds could be considered as an attractive target for a specific group of investors, their interest rates are not competitive compared to the yields attainable by speculation on the foreign exchange market.