An expected increase in demand for government bonds in Hungary is due to regulatory changes introduced back in May. These promote state issues while penalizing some investments at the same time. A social contribution tax was slapped on savings at 13%, and there are now minimum investment fund levels for government bonds and holdings. Windfall tax can be cut by up to half in the 2024 year with increased local government bond purchases.
There was a government decree that levied a 13% tax on all investment fund returns except real estate funds, as well as other investments and bank deposits. This is a levy over the 15% tax on interest gains.
What About Hungarian Households?
In other good news, households get these government bonds without fees, and your gains also avoid tax. Banks will inform clients yearly about the potential gains made when deposits are avoided and government bonds are chosen.
Marton Nagy, Economic Development Minister, stated that government holdings and bonds with banks are due to see additional demand and growth of HUF1.3 trillion. Some have speculated they could get as high as HUF500.
There is a Hungarian government decree imposing a mandatory allocation that is de facto for government bonds for equity funds, bond funds, and mixed funds. The April decree set the standard in portfolios to 60% regarding the number of securities held. More recently, a government regulation states these funds need liquid assets at a 20% minimum for treasury bills that are discounted from August 1.
What About Allocations?
When HUF11 trillion is held with investment funds, you’ll have HUF3 trillion with investment units, HUF3.2 trillion with deposits and cash, HUF2 trillion in shares, and HUF2.7 trillion in bonds. According to Portfolio.hu, a financial website, there is more than HUF1.5 trillion held in domestic investment funds with bonds that aren’t Hungarian.
With liquidity in mind, the change is a nonissue for banks, but there is the possibility of 5%-10% of the retail funding for banks moving. Banks only have the opportunity to stop this for large profit losses. With ratios for loan-to-deposit low, they are likely to do neither. This is from the Economic Development Minister, Marton Nagy. He also stated the measure’s main goal for imposing a tax rate of 13% for savings is to have funds for government bonds. These budget impacts seem to be secondary.
There are anticipated hundreds of billions coming from retail investors into government securities. This is expected to come from the HUF8 trillion the bank deposits have. Nagy has said this is from analysts. Overall, this move is thought to have a negative impact on the banks. The government has also received negative feedback for going back on the promise to phase windfall taxes out. With all the turmoil, many await to see what the Hungarian economy will bring in 2024.
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