The government is committed to protecting families, and therefore, it wants to encourage and assist the general population in preserving the value of their savings in the midst of sanctions-driven inflation. To this end, the government has decided to introduce a four-element package of measures that will reduce the state’s interest expenses, improve our country’s self-financing capacity, increase demand for government bonds, and ensure that household savings retain their real value, the Ministry of Economic Development (GFM) announced on Wednesday.
Two of the four measures direct household savings towards government bonds, while the other two increase the demand for government bonds among institutional players such as banks and investment funds.
The GFM pointed out that concerning household savings, the government introduced a regulation that mandates banks to inform their customers about investment opportunities in government bonds for individuals. Banks are expected to demonstrate to their clients how much additional interest income they could have earned over a one-year period if they had kept their savings in various government bonds instead of a current account. The banks began providing this information on 1 October.
Another aspect of the steps affecting households is that the government has imposed a 13 per cent social contribution tax on financial instruments subject to interest tax,
making tax-free government bonds even more attractive from 1 July 2023.
For institutional players, the government allows banks to reduce their extra-profit tax obligations if they increase their long-term government bond holdings.
Finally, with respect to investment funds, the government expects that the share of securities in assets held by equity funds should reach 60 per cent, with no more than five per cent invested in securities denominated in forints that represent a credit relationship different from government bonds. In the case of equity and real estate funds, the share of Discount Treasury Bills (DKJ) within liquid assets should reach 20 per cent. The GFM reported that the government’s actions have significantly increased the amount of government bonds managed by institutional investors. By August 2023, in just under three months, the amount of government bonds held by investment funds had increased by nearly 40 per cent, approaching 1.8 trillion forints.
As a result of these redirection measures, Hungary’s self-financing capacity has also strengthened.
Since the end of May, foreigners have reduced their holdings of Hungarian government bonds by nearly 84 billion forints, reducing the proportion of government bonds held by foreigners to just over 29.6 per cent by August, if only slightly, from over 30 per cent.
The GFM believes that there has been a significant increase in demand for Discount Treasury Bills (DKJ), leading to lower yields.
In the recent period, substantial demand has arisen in government bond auctions, resulting in a cumulative surplus issuance of over 280 billion forints in the DKJ market.
Likewise, due to strong demand in the second quarter, this year’s surplus issuance of long-term government bonds has already exceeded 640 billion forints. Yields have also significantly decreased, with the 3-month DKJ yield falling by 433 basis points to 9.29 per cent due to significant demand, while there has also been noticeable yield reduction in primary issuances of other short- and long-term government bonds.
The government’s four measures have proven to be extremely effective, as both households and institutional players have significantly increased their holdings of government bonds. In summary, the financial awareness of the population and the country’s self-financing capacity have both improved as a result of these measures. In an unprecedented manner,
households now hold a larger amount of government bonds than bank deposits,
with these redirection measures generating approximately 1.2 trillion forints in direct and indirect demand for government bonds in recent months, while household bank deposits have decreased by 400 billion forints. By the end of August, households held 11.942 trillion forints in government bonds and 11.723 trillion forints in bank deposits, as reported by the GFM.
Sources: Hungarian Conservative/GFM/MTI