Hungary promotes government bonds

The Hungarian government has implemented regulatory changes aimed at boosting demand for government bonds and penalising other investment options. These changes, which came into effect on May 31, are expected to increase demand for government bonds by HUF1.8 trillion (€4.8 billion).

Under the new regulations, a “social contribution tax” of 13% has been imposed on savings, and investment funds are required to maintain minimum levels of government bond holdings. Banks can reduce windfall tax payments for 2024 by up to 50% if they increase their purchases of local government bonds.

In addition to the 15% interest gain tax, a 13% tax has been levied on returns from investment funds, bank deposits, and certain other investments. Real estate funds are exempt from this additional levy. Individuals can purchase government bonds without any fees, and the gains from these bonds are exempt from the interest tax. Banks are also required to inform clients annually about potential gains that can be made by choosing government bonds over deposits.

Economic Development Minister Marton Nagy anticipates that the stock of government bond holdings by banks could increase by HUF1.3 trillion, while investment funds may generate additional demand of up to HUF500 billion. The government has effectively made it mandatory for bond funds, equity funds, and mixed funds to allocate a portion of their portfolios to Hungarian government bonds. The latest regulation stipulates that these funds must hold at least 20% of their liquid assets in discount treasury bills starting from August 1.

While the liquidity impact on banks is expected to be minimal, the restructuring of savings could result in 5-10% of retail funding moving away from banks. This could lead to a significant loss of profits for banks, although they are unlikely to intervene due to their low loan-to-deposit ratios. The primary objective of the 13% tax on savings is to channel funding towards government bonds, with the budgetary impacts considered secondary. Analysts suggest that retail investors could redirect hundreds of billions from the approximately HUF8 trillion held in bank deposits to government securities.

The Hungarian Banking Association has expressed disapproval of the government’s measures, arguing that they will have negative consequences for the banking sector. The association accuses the government of breaking its promise to phase out windfall taxes for the financial sector. Extending the extra profit tax in 2024 is expected to reduce revenues and lending for financial institutions, weakening the overall resilience of the economy.