## HUNGARY’S PUBLIC DEBT STRATEGY: NEW RETAIL GOVERNMENT SECURITY

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---

### Overview and Purpose
- The note describes and discusses potential implications of recent changes in Hungary’s public debt strategy, with special attention to the “Hungarian Government Security Plus Scheme” (MÁP+), introduced in June 2019.
- Main synthesis:
  - Retail bonds are usually perceived as more stable funding.
  - MÁP+ should be continuously monitored to ensure objectives are achieved in the most cost-efficient manner and to avoid unintended distortions.

### General Objectives for Public Debt Strategy
- Public debt management objectives emphasized:
  - Ensure prompt payment of obligations at the lowest possible cost over the medium term, while reflecting risks and externalities.
  - Limit mismatches involving exchange rate, interest rate, and maturity (roll-over) risks.
  - Strive for a broad investor base with due regard for cost and risks, treating investors equitably.
  - Consider sovereign asset-liability management and attention to external exposures of the private sector.
- Choice between retail and wholesale funding:
  - Aim to develop an efficient government securities market and a yield curve to support domestic mortgage and commercial bond markets.
  - Retail securities can target specific groups and encourage savings, financial literacy, and inclusion, but segmented domestic markets reduce liquidity and can raise costs.

### Hungary’s Stated Strategy and Targets
- Primary objectives from ÁKK’s “Debt Management Outlook”:
  - Support a debt reduction with legal/EU constraints:
    - If (cash) central government debt exceeds 50 percent of GDP, Parliament must adopt a budget reducing this ratio.
    - As an EU member, Hungary is expected to reduce (accrual) general government debt exceeding 60 percent of GDP by at least 1/20 each year of the difference between actual debt and the threshold.
  - Reduce external vulnerabilities:
    - Target range for the share of FX denominated central government debt was lowered to between 10 to 20 percent beginning 2019.
    - ÁKK hedges its non-euro FX debt by swapping into euros, allowing for 5 percent deviation of the actual FX denominated amount.
  - Enhance the domestic investor base, particularly smaller retail investors:
    - Only around three percent of retail securities are sold back to the retail primary dealers before maturity (Barcza, 2018).

### Recent Developments in Hungary’s Public Debt — Key Statistics
- General government debt path and related figures:
  - General government debt peaked at 80.8 percent of GDP in 2011.
  - Reduced to 70.2 percent of GDP by end-2018.
  - Expected to further decline due to lower deficits and a negative differential between the real interest rate and potential growth.
- Annual gross public financing needs:
  - 21.6 percent of GDP (2018).
- Composition and vulnerability changes:
  - FX denominated debt at peak in 2011: 48½ percent of central government debt.
  - FX denominated share declined to 18¼ percent by September 2019.
  - Share of government securities held by non-residents declined from about 40 percent to just below 25 percent over the same period.
  - Retail bonds share of total central government debt increased from about 2⅓ percent in 2011 to almost 26¼ percent at end-2018.
- Memoranda and sustainability (selected table entries reproduced as provided):
  - Public foreign currency denominated debt in percent of gross international reserves: 77.2 (with change 10.6 in table context).
  - Sustainability (r - g), percent: ‑4.9, ‑4.5, ‑3.2, ‑0.3, ‑1.8, ‑1.7, ‑5.1, ‑5.2, ‑4.2, ‑4.5 (as reported).

### Active Public Debt Management Policies and Effects
- ÁKK’s Retail Securities Program:
  - Developed special retail securities offered at a premium; made purchases easier and cheaper via local treasury offices and banks.
  - Banks initially allowed to purchase these securities in the secondary market; ÁKK introduced restrictions to limit potential arbitrage and help cash management. Banks are now required to offer ÁKK such securities.
  - ÁKK pays banks a commission to encourage sales; banks may still charge clients additional fees.
  - Households paused portfolio adjustment since 2016, likely due to lower yields (MNB, 2019, p. 66).
- MNB’s Self-Financing Program combined with ÁKK’s Wholesale Program:
  - Launched March 2014 to lower FX denominated and non-resident holdings of public debt by incentivizing banks to place excess liquidity in government securities.
  - Bank holdings of government securities rose from about 15 percent of GDP in March 2014 to 21 percent at end-2016, declining to about 19 percent of GDP by mid-2019 in ratio terms but increasing in nominal terms.
  - Nagy and Kolozsi (2017) estimated yields of government securities were lowered by 75–90 bp due to this program.
- ÁKK market activity:
  - Issued longer maturity bonds and tailored retail bonds.
  - Used buy-backs and bond-exchanges to reduce refinance risk.
  - Uses a range of cash management tools, including repurchase agreements, to maintain a targeted reserve with the single treasury account.

### International Experience with Retail Government Securities — Context
- Several countries promoted retail government securities but many programs were closed because administration costs and premiums made retail issuance more expensive than wholesale funding.
- Design considerations:
  - To lower funding costs, securities should be as liquid as possible to capture the “liquidity premium.”
  - Trade-offs between catering to special demand (segmenting market) and achieving standardized liquid instruments.
  - Design features used internationally: reduced fees/commissions, tax incentives, ability to sell back to the government, assistance via brokers.
  - Low interest-rate environments and enhanced deposit insurance can make retail government securities less attractive versus bank deposits.

### MÁP+ Specifics
- Introduction and scale:
  - MÁP+ introduced in June 2019 as a retail government security tailored to individuals.
  - Stock of outstanding retail securities amounted to "just over 17½ percent of GDP" at end-2018; HUF 5,800 billion, or "about 13½ percent of GDP", were held by individuals.
  - Authorities announced in April 2019 an intention to increase households’ holdings of retail government securities to HUF 11,000 billion by 2023 ("about 19 percent of projected 2023 GDP, including through issuing MÁP+").
- Declared primary objectives:
  - Reduce external refinancing risk.
  - Sustain a high savings rate of households.
  - Reduce cash hoarding.
- Secondary aims:
  - Contain consumption and imports.
  - Take pressure off the real estate market in the near term.
  - Activate part of increasing cash holdings.

### MÁP+ Key Features (as introduced)
- Maturity: 5-year.
- Initial yield schedule:
  - 3.5 percent the first half year,
  - 4 percent in the second half year,
  - increases by 50 bp each year until reaching 6 percent by the end of its 5-year maturity.
- Simple average annual yield: 4.95 percent.
- Interest is automatically reinvested but can be redeemed without charges.
- Redemption: apart from the 5-day period when interest is paid, investors can redeem securities at any time for a fee not exceeding 25 basis points.
- Tax treatment: interest income from retail government securities for households has been exempt from taxation since June 2019; interest income on bank deposits remains taxable.
- Secondary market and arbitrage controls:
  - If sold before maturity, ÁKK has the right to buy them back to avoid arbitrage.
  - ÁKK encouraged dealers to focus sales on residents to contain arbitrage to foreign individuals.
  - Use as collateral for loans with Hungarian banks was explicitly prohibited effective October 14, 2019.
- Access and costs:
  - Hungarian physical persons can open an account with the treasury and purchase MÁP+ free of charge, with no lower or upper limit.
  - If purchased via a bank, there may be additional fees and commissions.
- Portfolio management purpose: intended to substitute some existing shorter maturity bonds and extend the average maturity.

### Initial Experiences (as of end-September 2019)
- Issuance: about HUF 2.1 trillion ("just over 4½ percent of GDP") MÁP+ had been issued.
- Total retail government securities amounted to "about 19 percent of projected GDP".
- Funding sources of MÁP+ purchases (estimates and market observations):
  - Almost half funded from roll-overs and sales of other retail government securities.
  - Another 10-15 percent from investment funds, including property funds.
  - Around 10 percent of the funding estimated to have come from bank deposits.
  - Market observers estimate up to 10 percent from a smaller increase in currency in circulation.
  - Remaining part reflects increased savings.
- Distribution of purchases: about 70 percent of the sales have been to account holders with addresses in the capital area.
- Anecdotal evidence: interest for residential housing for investment purposes in Budapest has eased after introduction of MÁP+.

### Potential Implications, Trade-offs, and Quantified Scenarios
- Return and budget cost:
  - MÁP+ nominally costlier for the budget than current domestic wholesale or external funding.
  - Simple average annual yield 4.95 percent compared to the domestic 5-year wholesale benchmark yield declining from 1.7 to 1.0 percent between mid-June and September (benchmark was 1.01 percent in September 2019 in some comparisons).
  - When originally determined, MÁP+ rate was about 20 bp higher than yield of a 5-year inflation-linked retail bond (PMÁP) based on MNB inflation projections at that time.
- Opportunity cost estimates:
  - If similar sales could have been achieved at an effective yield of 3 percent, the excess pricing from MÁP+ issued during Q3 2019 would have cost the budget an extra HUF 41 billion, or "about 0.1 percent of GDP".
  - Compared to the 5-year wholesale benchmark interest rate (1.01 in September 2019), additional budget expense is larger ("almost 0.2 percent of GDP").
  - Illustrative scenario: applying the current difference between annual average MÁP+ yield and the current annual interest rate of the 5-year wholesale benchmark bond (1.01 percent in September) to half the declared retail bond target sales by 2023 (HUF 11,000 billion) issued solely as MÁP+ would amount to almost "½ percent of GDP", all other things equal.
  - This amount would be smaller if:
    - other less expensive retail bonds continue to be purchased by retail investors; and/or
    - the interest rate on larger wholesale funding increases over time.
- Arbitrage concerns:
  - Individuals with good credit ratings could borrow abroad in euros, convert to HUF, buy MÁP+, and swap the HUF return back to euros and still profit (reflects sovereign risk).
  - ÁKK actions: encouraged resident-targeted sales; prohibition of using MÁP+ as collateral effective October 14, 2019.
- Yield curve and banking implications:
  - MÁP+ pricing will affect relative prices of other funding sources.
  - Current banks’ loan-to-deposit ratio is well below 100 and they generally have a comfortable LCR; retail government securities do not appear to crowd-out bank deposits to an extent that would affect new bank lending presently.
  - Over time, more expensive government retail debt could potentially increase funding costs of banks, making borrowing more expensive.
- External risk reduction considerations:
  - Shadow price of external vulnerability is affected by reduced external exposure and projected improvement in Hungary’s net external debt position.
  - Hungary’s net international debt position is projected to become positive in late 2021.
  - Presence in international markets and additional rating upgrades could further lower financing costs; however, low tolerance to foreign exposure may keep external financing unattractive.
- Other fiscal and market considerations:
  - Higher funding costs of MÁP+ will increase the budget deficit, but extension of maturities could reduce annual gross financing needs in the near term.
  - Average maturity of the retail portfolio has already increased from 18 to 30 months.
  - MÁP+ functions akin to a reduction of the personal income tax on savings; wealthier individuals are likely to benefit most.
  - Exemption of interest earnings from taxation may shift distribution of savings toward government bonds and away from other financial assets.
  - Additional tax revenue from higher interest income is limited because interest income on government securities for individuals is no longer taxed; any additional tax revenue would only come from VAT on increased spending generated by the bonds.
- Monetary and credit policy implications:
  - MÁP+ mitigates adverse impact of negative real interest rates on households stemming from accommodating monetary policy.
  - MÁP+ could enable prolonging accommodative monetary stance because it aids in curtailing private consumption and housing investment effects of accommodation.
  - MNB needs recalibrations of day-to-day liquidity management to account for share of bank deposits and cash in circulation used to buy MÁP+.

### Initial Assessment and Policy Actions Observed
- Observed cost: during Q3 alone, MÁP+ has cost the budget "almost 0.2 percent of GDP" extra per year compared to similar domestic wholesale benchmark bond.
- Public debt management should respond to changing market conditions:
  - Example: ÁKK decision announced late October 2019 to lower interest rate on some retail bonds beginning early November 2019 and to cut distribution fees to banks beginning 2020.
  - Authorities should continue to review retail bond programs, including MÁP+ pricing, maturities, and sales channels, and consider diversification and presence in international markets.

### Cash in Circulation — Hungary (Levels, Drivers, and Policy Context)
- Current level and trend:
  - Currency in circulation in percent of GDP in Hungary has doubled since 2004, and now exceeds 14 percent of GDP.
  - After the global financial crisis, cash in percent of broad money (M3) began to increase; this trend has recently begun to decelerate.
- Financial Transaction Tax (FTT):
  - Introduced beginning 2013.
  - Effective February 2014: two free ATM withdrawals per month not exceeding in total HUF 150,000 (about €450).
  - Current tax rate: 0.3 percent for financial transactions and 0.6 percent for cash withdrawals (not covered by exemptions) that are above HUF 20,000 by physical persons.
  - The tax is capped at HUF 6,000 (about €19) per transaction (but no cap on large cash withdrawals).
  - Tax on payments by credit cards: flat fee of HUF 800 per card per year (HUF 500 in the case of the special contactless cards).
  - Total revenue from the financial transaction tax amounts to about 0.5 percent of GDP, of which the bulk are on corporate transactions.
  - Beginning 2019: all transactions by individuals below HUF 20,000 were exempted to promote the forthcoming instant retail payment system.
- Cash and shadow economy measures:
  - September 2014: electronic cash registers with remote audit capability became mandatory.
  - Since July 2018: all VAT registered taxpayers must submit invoices with at least HUF 100,000 VAT content in real-time.
  - Medina and Schneider (2018) estimated the share of the shadow economy declined from about 25 percent of GDP in 2000 to about 20 percent in 2015.
- Instant retail payment system:
  - Planned introduction: March 2020.
  - Coverage: credit transfers up to HUF 10 million (€31,250).
  - Settlement: within 5 seconds.
  - Access requirement: mobile phone number within the EEA or an email address, and a domestic tax identification number.
  - System is mandatory for all domestic banks.
  - Transactions over HUF 20,000 will remain subject to the financial transaction tax.
- Banknote denomination distribution:
  - Share of the volume (value) of the two largest denominations — HUF 20,000 (€60) and HUF 10,000 (€30) — increased since 2010 from 56 (91) to almost 70 (over 94) percent of all issued banknotes.

### MÁP+ and Cash — Interaction and Empirical Observations
- MÁP+ intended to absorb cash; thus far limited effect:
  - MNB estimates less than 10 percent of purchased MÁP+ have substituted cash.
  - From June to end-September 2019, total issued MÁP+ amounted to about 4½ percent of GDP.
  - MÁP+ is a 5-year bond with the annual average yield of about 5 percent.
- Initial funding mix estimates (reproduced):
  - Almost half from roll-overs and sales of other retail government securities.
  - 10-15 percent from investment funds, including property funds.
  - Around 10 percent from bank deposits.
  - Up to 10 percent from a smaller increase in currency in circulation.
  - Remaining from increased savings.

### Empirical Analysis — Stylized Facts and Regression Results (2000–2018)
- Panel regression (fixed effects) for multiple countries:
  - Income elasticity: positive and significant (IncomeR coefficients: 1.69***, 1.73***, 1.52***, 1.51***, 1.59***).
  - Interest: negative but not always significant (Interest coefficients: -0.02**, -0.02**, 0.00, -0.02**, -0.02**).
  - Inflation: ambiguous (Inflation coefficients: 0.00**, 0.00**, -0.02, -0.02, -0.03*).
  - Bank Crises: small and not statistically significant.
  - Governance indicators: appeared to reduce demand for cash but were not statistically significant in the panel.
  - Sample sizes and fit: N = 214, 214, 176, 176, 176; R2_Adjusted = 0.75, 0.75, 0.75, 0.74, 0.77.
- Hungary-specific OLS results (2000–2018):
  - IncomeR: 1.13***.
  - Interest: -0.02**.
  - Inflation: 0.02**.
  - IncomeR * After_2013_DUMMY: 0.02**.
  - Corruption: -0.50**.
  - N: 18; R2_Adjusted: 0.98.
- Impact of the financial transaction tax (FFT):
  - Structural break around 2013 detected.
  - Difference between actual real currency in circulation per capita and fitted line (based on 2000–2012 coefficients) is about HUF 100,000 per capita for 2013–2018 (graph axis labels indicate Real Demand for Cash per Capita in Thousand HUF with values spanning 900 to 1,700).
  - Conclusion: FFT contributed to higher use of cash and coincided with the structural break.

### Conclusions and Recommendations (Policy Implications)
- Public debt management objective: balance reducing funding cost and limiting vulnerabilities.
- MÁP+ has reasonable objectives, but some (higher household savings, reduced external indebtedness) are largely driven by macroeconomic policies.
- Key questions going forward:
  - Can the objectives be achieved at appreciably lower budget cost given less expensive alternative funding sources and policy options?
  - How to weigh opportunity cost of reducing external vulnerabilities, refinancing risks, maintaining high household savings, reducing cash hoarding, and redistributing budgetary resources—ultimately a political decision.
- Observed cost: during Q3 alone, MÁP+ has cost the budget "almost 0.2 percent of GDP" extra per year compared to similar domestic wholesale benchmark bond.
- Recommended ongoing actions:
  - Continuously monitor MÁP+ to ensure objectives are achieved in the most cost-efficient manner and to avoid unintended distortions.
  - Review retail bond programs, including MÁP+ pricing, maturities, and sales channels.
  - Consider diversification and presence in international markets as part of broader debt management strategy.
  - Account for interactions with monetary and liquidity management (MNB recalibrations needed).
  - Use targeted adjustments (e.g., altering yields, maturities, distribution fees) as market conditions and observed costs evolve.

*Source: 1hunea2019002 — IMF staff analysis reproduced from the supplied content unit.*

### References _________________________________________________________________________________ 12

### HUNGARY’S PUBLIC DEBT STRATEGY: NEW RETAIL GOVERNMENT SECURITY

### Overview and Purpose
- The note describes and discusses potential implications of recent changes in Hungary’s public debt strategy, with special attention to the “Hungarian Government Security Plus Scheme” (MÁP+), introduced in June 2019.
- Main synthesis:
  - Retail bonds are usually perceived as more stable funding.
  - MÁP+ should be continuously monitored to ensure objectives are achieved in the most cost-efficient manner and to avoid unintended distortions.

### General Objectives for Public Debt Strategy
- Public debt management objectives emphasized:
  - Ensure prompt payment of obligations at the lowest possible cost over the medium term, while reflecting risks and externalities.
  - Limit mismatches involving exchange rate, interest rate, and maturity (roll-over) risks.
  - Strive for a broad investor base with due regard for cost and risks, treating investors equitably.
  - Consider sovereign asset-liability management and attention to external exposures of the private sector.
- Choice between retail and wholesale funding:
  - Aim to develop an efficient government securities market and a yield curve to support domestic mortgage and commercial bond markets.
  - Retail securities can target specific groups and encourage savings, financial literacy, and inclusion, but segmented domestic markets reduce liquidity and can raise costs.

### Hungary’s Stated Strategy and Targets
- Primary objectives from ÁKK’s “Debt Management Outlook”:
  - Support a debt reduction. Legal/EU constraints:
    - If (cash) central government debt exceeds 50 percent of GDP, Parliament must adopt a budget reducing this ratio.
    - As an EU member, Hungary is expected to reduce (accrual) general government debt exceeding 60 percent of GDP by at least 1/20 each year of the difference between actual debt and the threshold.
  - Reduce external vulnerabilities:
    - Target range for the share of FX denominated central government debt was lowered to between 10 to 20 percent beginning 2019.
    - ÁKK hedges its non-euro FX debt by swapping into euros, allowing for 5 percent deviation of the actual FX denominated amount.
  - Enhance the domestic investor base, particularly smaller retail investors:
    - Only around three percent of retail securities are sold back to the retail primary dealers before maturity (Barcza, 2018).

### Recent Developments in Hungary’s Public Debt (Key Statistics)
- General government debt path and related figures:
  - General government debt peaked at 80.8 percent of GDP in 2011.
  - Reduced to 70.2 percent of GDP by end-2018.
  - Expected to further decline due to lower deficits and a negative differential between the real interest rate and potential growth.
- Annual gross public financing needs:
  - 21.6 percent of GDP (2018).
- Composition and vulnerability changes:
  - When public debt peaked in 2011, FX denominated debt amounted to 48½ percent of central government debt.
  - FX denominated share more than halved to 18¼ percent by September 2019.
  - Share of government securities held by non-residents declined from about 40 percent to just below 25 percent over the same period.
  - Retail bonds share of total central government debt increased from about 2⅓ percent in 2011 to almost 26¼ percent at end-2018.
- Memoranda and sustainability:
  - Public foreign currency denominated debt in percent of gross international reserves: 77.2 (with change 10.6 in table context).
  - Sustainability (r - g), percent: values in table include ‑4.9, ‑4.5, ‑3.2, ‑0.3, ‑1.8, ‑1.7, ‑5.1, ‑5.2, ‑4.2, ‑4.5 (as reported in table).

### Active Public Debt Management Policies and Effects
- Policies that impacted debt structure:
  - ÁKK’s Retail Securities Program:
    - Developed special retail securities offered at a premium; made purchases easier and cheaper via local treasury offices and banks.
    - Banks were initially allowed to purchase these securities in the secondary market; ÁKK introduced restrictions to limit potential arbitrage and help cash management. Banks are now required to offer ÁKK such securities.
    - The ÁKK pays banks a commission to encourage sales; banks may still charge clients additional fees.
    - Households paused portfolio adjustment since 2016, likely due to lower yields (MNB, 2019, p. 66).
  - MNB’s Self-Financing Program combined with ÁKK’s Wholesale Program:
    - Launched March 2014 to lower FX denominated and non-resident holdings of public debt by incentivizing banks to place excess liquidity in government securities.
    - MNB adjusted monetary policy instruments to make them less liquid and offered conditional interest rate swaps to entice purchases of longer-maturity government securities.
    - Bank holdings of government securities rose from about 15 percent of GDP in March 2014 to 21 percent at end-2016, declining to about 19 percent of GDP by mid-2019 in ratio terms but increasing in nominal terms.
    - Nagy and Kolozsi (2017) estimated that yields of government securities were lowered by 75–90 bp due to this program.
- ÁKK market activity:
  - Issued longer maturity bonds and tailored retail bonds.
  - Used buy-backs and bond-exchanges to reduce refinance risk.
  - Uses a range of cash management tools, including repurchase agreements, to maintain a targeted reserve with the single treasury account.

### International Experience with Retail Government Securities (Context)
- Several countries promoted retail government securities but many programs were closed due to cost considerations when administration costs and premiums made retail issuance more expensive than wholesale funding.
- Design considerations for retail programs:
  - To lower funding costs, securities should be as liquid as possible to capture the “liquidity premium.”
  - Trade-offs exist between catering to special demand (segmenting market) and achieving standardized liquid instruments.
  - Examples of design features: reduced fees/commissions, tax incentives, ability to sell back to the government (e.g., South Africa), or assistance via brokers (e.g., Treasury Direct in the USA).
  - Low interest-rate environments and enhanced deposit insurance can make retail government securities less attractive versus bank deposits.

### MÁP+ Specifics and Initial Assessment
- MÁP+ introduced in June 2019 as a retail government security tailored to individuals.
- Early considerations and guidance:
  - MÁP+ may provide more stable funding relative to some wholesale markets.
  - Continuous monitoring recommended to ensure objectives are achieved cost-efficiently and to avoid unintended market distortions.
  - Evaluate trade-offs between providing retail-focused features and maintaining liquid, standardized securities that support market development.

*Source: 1hunea2019002 - References _________________________________________________________________________________ 12*

### 10.      A new bond (Hungarian Government Security Plus Scheme (MÁP+)) was introduced to

### 10.      A new bond (Hungarian Government Security Plus Scheme (MÁP+)) was introduced to

### Background and Objectives
- MÁP+ was introduced to Hungary’s retail bond program in June 2019.
- Stock of outstanding retail securities amounted to "just over 17½ percent of GDP" at end-2018; HUF 5,800 billion, or "about 13½ percent of GDP", were held by individuals.
- Authorities announced in April 2019 an intention to increase households’ holdings of retail government securities to HUF 11,000 billion by 2023 ("about 19 percent of projected 2023 GDP, including through issuing MÁP+").
- Declared primary objectives of MÁP+:
  - reduce external refinancing risk,
  - sustain a high savings rate of households,
  - reduce cash hoarding.
- Secondary aims: contain consumption and imports, take pressure off the real estate market in the near term, and activate part of increasing cash holdings.

### Key Features of MÁP+
- Maturity: 5-year.
- Initial yield schedule:
  - 3.5 percent the first half year,
  - 4 percent in the second half year,
  - increases by 50 bp each year until reaching 6 percent by the end of its 5-year maturity.
- Simple average annual yield: 4.95 percent.
- Interest is automatically reinvested but can be redeemed without charges.
- Redemption: apart from the 5-day period when interest is paid, investors can redeem securities at any time for a fee not exceeding 25 basis points.
- Tax treatment: interest income from retail government securities for households has been exempt from taxation since June 2019; interest income on bank deposits remains taxable.
- Secondary market and arbitrage controls:
  - If sold before maturity, ÁKK has the right to buy them back to avoid arbitrage.
  - ÁKK encouraged dealers to focus sales on residents to contain arbitrage to foreign individuals.
  - Use as collateral for loans with Hungarian banks was explicitly prohibited effective October 14, 2019.
- Access and costs:
  - Hungarian physical persons can open an account with the treasury and purchase MÁP+ free of charge, with no lower or upper limit.
  - If purchased via a bank, there may be additional fees and commissions.
- Purpose in portfolio management: intended to substitute some existing shorter maturity bonds and extend the average maturity.

### Initial Experiences (as of end-September 2019)
- Issuance: about HUF 2.1 trillion ("just over 4½ percent of GDP") MÁP+ had been issued.
- Total retail government securities amounted to "about 19 percent of projected GDP".
- Funding sources of MÁP+ purchases (estimates and market observations):
  - Almost half funded from roll-overs and sales of other retail government securities.
  - Another 10-15 percent from investment funds, including property funds.
  - Around 10 percent of the funding estimated to have come from bank deposits.
  - Market observers estimate up to 10 percent from a smaller increase in currency in circulation.
  - Remaining part reflects increased savings.
- Distribution of purchases: about 70 percent of the sales have been to account holders with addresses in the capital area.
- Anecdotal evidence: interest for residential housing for investment purposes in Budapest has eased after introduction of MÁP+.

### Potential Implications and Trade-offs
- Return and budget cost:
  - MÁP+ nominally costlier for the budget than current domestic wholesale or external funding.
  - Simple average annual yield 4.95 percent compared to the domestic 5-year wholesale benchmark yield declining from 1.7 to 1.0 percent between mid-June and September (benchmark was 1.01 percent in September 2019 in some comparisons).
  - When originally determined, MÁP+ rate was about 20 bp higher than yield of a 5-year inflation-linked retail bond (PMÁP) based on MNB inflation projections at that time.
- Opportunity cost estimates:
  - If similar sales could have been achieved at an effective yield of 3 percent, the excess pricing from MÁP+ issued during Q3 2019 would have cost the budget an extra HUF 41 billion, or "about 0.1 percent of GDP".
  - Compared to the 5-year wholesale benchmark interest rate (1.01 in September 2019), additional budget expense is larger ("almost 0.2 percent of GDP").
  - Illustrative scenario: applying the current difference between annual average MÁP+ yield and the current annual interest rate of the 5-year wholesale benchmark bond (1.01 percent in September) to half the declared retail bond target sales by 2023 (HUF 11,000 billion) issued solely as MÁP+ would amount to almost "½ percent of GDP", all other things equal.
  - This amount would be smaller if:
    - other less expensive retail bonds continue to be purchased by retail investors; and/or
    - the interest rate on larger wholesale funding increases over time.
- Arbitrage concerns:
  - Individuals with good credit ratings could borrow abroad in euros, convert to HUF, buy MÁP+, and swap the HUF return back to euros and still profit (reflects sovereign risk).
  - ÁKK actions: encouraged resident-targeted sales; prohibition of using MÁP+ as collateral effective October 14, 2019.
- Yield curve and banking implications:
  - MÁP+ pricing will affect relative prices of other funding sources.
  - Current banks’ loan-to-deposit ratio is well below 100 and they generally have a comfortable LCR; retail government securities do not appear to crowd-out bank deposits to an extent that would affect new bank lending presently.
  - Over time, more expensive government retail debt could potentially increase funding costs of banks, making borrowing more expensive.
- External risk reduction considerations:
  - Shadow price of external vulnerability is affected by reduced external exposure and projected improvement in Hungary’s net external debt position.
  - Hungary’s net international debt position is projected to become positive in late 2021.
  - Presence in international markets and additional rating upgrades could further lower financing costs; however, low tolerance to foreign exposure may keep external financing unattractive.
- Other fiscal and market considerations:
  - Higher funding costs of MÁP+ will increase the budget deficit, but extension of maturities could reduce annual gross financing needs in the near term.
  - Average maturity of the retail portfolio has already increased from 18 to 30 months.
  - MÁP+ functions akin to a reduction of the personal income tax on savings; wealthier individuals are likely to benefit most.
  - Wealthy investors might shift from riskier investments to safer MÁP+, while middle class may reduce residential real estate investment.
  - Exemption of interest earnings from taxation may shift distribution of savings toward government bonds and away from other financial assets.
  - Additional tax revenue from higher interest income is limited because interest income on government securities for individuals is no longer taxed; any additional tax revenue would only come from VAT on increased spending generated by the bonds.
- Monetary and credit policy implications:
  - MÁP+ mitigates adverse impact of negative real interest rates on households stemming from accommodating monetary policy.
  - MÁP+ could enable prolonging accommodative monetary stance because it aids in curtailing private consumption and housing investment effects of accommodation.
  - Accommodating monetary policy supports aggregate demand while MÁP+ aims to boost household savings and curtail aggregate demand.
  - MNB needs recalibrations of day-to-day liquidity management to account for share of bank deposits and cash in circulation used to buy MÁP+.

### Conclusion and Recommendations
- Public debt management objective: balance reducing funding cost and limiting vulnerabilities.
- MÁP+ has reasonable objectives, but some (higher household savings, reduced external indebtedness) are largely driven by macroeconomic policies.
- Key questions going forward:
  - Can the objectives be achieved at appreciably lower budget cost given less expensive alternative funding sources and policy options?
  - How to weigh opportunity cost of reducing external vulnerabilities, refinancing risks, maintaining high household savings, reducing cash hoarding, and redistributing budgetary resources—ultimately a political decision.
- Observed cost: during Q3 alone, MÁP+ has cost the budget "almost 0.2 percent of GDP" extra per year compared to similar domestic wholesale benchmark bond.
- Public debt management should respond to changing market conditions:
  - Example: ÁKK decision announced late October 2019 to lower interest rate on some retail bonds beginning early November 2019 and to cut distribution fees to banks beginning 2020.
  - Authorities should continue to review retail bond programs, including MÁP+ pricing, maturities, and sales channels, and consider diversification and presence in international markets.

*Source: IMF staff analysis in the Hungary country report section on MÁP+ (as provided in the supplied content).*

### 5.      Currency in circulation in percent of GDP has been increasing in most countries,

### 5.      Currency in circulation in percent of GDP has been increasing in most countries, including in Hungary, despite new technologies which increased the efficiency of non-cash payments.

### Cross-country patterns and notable cases
- Cash use appears to be declining only where forceful efforts promoted non-cash alternatives.
- Sweden: cash in circulation has continuously been declining to below 1½ percent of GDP.
- Japan: currency in circulation exceeds 18 percent of GDP.
- General finding: currency in circulation in percent of GDP has been increasing in most countries.

### Analytical context and model-based insights
- Ilyés and Varga (2016) — substituting cash with debit cards, in successive order, would: (i) improve the efficiency or resources already available; (ii) reduce the deadweight loss of cash services; and (iii) release resources from the costlier cash payments.
- Rogoff (2016, page 2) — curtailing paper currency could reduce tax evasion by 10–15% (covering printing profit costs) and restrict illegal activities; large denominations hamper negative interest rate use.

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### Cash in Circulation in Hungary

### Current level and recent trend
- Currency in circulation in percent of GDP in Hungary has doubled since 2004, and now exceeds 14 percent of GDP.
- After the global financial crisis, cash in percent of broad money (M3) began to increase; this trend has recently begun to decelerate.
- The introduction of the financial transaction tax coincided with increasing use of cash since 2013; efforts to reduce the shadow economy may have contributed to recent deceleration.

### Comparisons with peers
- Only the Czech Republic has a higher amount of cash holdings in Euros per capita among regional peers.
- The Euro Area and Switzerland have higher amounts of paper currency per capita in Euros, partly due to higher income per capita and use by non-residents.

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### Typical Determinants of Cash Usage

### Standard determinants (mechanisms)
- Income per capita (income effect): cash in circulation tends to increase when income per capita increases.
- Opportunity cost / substitution effect: higher interest rates on alternative assets reduce the demand for cash.
- Inflation: ambiguous impact — may increase demand for transactions but raises opportunity cost of holding cash.

### Supplementary factors (country-specific)
- Economic policy uncertainty and financial sector stability (trust in currency and banking system).
- Governance policies: rule of law, control of corruption, government effectiveness, ethics of private firms.
- Structure of the economy: tourism, agriculture, employment composition.
- Socioeconomic factors: level of education, income inequality, internet access.
- Demographics: older populations less inclined to accept new payment instruments.

### Table summary (selected entries reproduced as stated)
- Macroeconomic factors:
  - Income per capita: +++ (Income effect); proxy: GDP per capita
  - Interest rates: ‐‐ (Substitution effect); proxy: Money market rates or yields of benchmark government securities
  - Inflation: ‐‐ / + (Reduces value of cash, but increases need for transactions); proxy: CPI
- Economic risk and uncertainty:
  - Economic policy stability: +/‐; proxy: Economic policy uncertainty indices, indices for sovereign and currency crises
  - Financial sector stability: ‐‐ (Trust in financial system); proxy: Indices for systemic banking crises (Laeven and Valencia, 2018)
- Demographics:
  - Share of older population: +; proxy: WB World Development Indicators
- Socioeconomic factors:
  - Economic structure: + (agriculture, tourism, higher inequality, fewer highly educated); proxy: WB World Development Indicators
  - Financial deepening: ‐; proxy: Broad money and credit to private sector in percent of GDP (WB Global Financial Development Database)
  - Digitalization: ‐; proxy: WB Global Financial Development Database
- Governance indicators: ‐; proxies: World Wide Governance indicators, WB Doing Business, Global Competitiveness Index

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### Hungarian-specific factors

### Financial Transaction Tax (FTT)
- Introduced beginning 2013; impact widely debated (whether it spurred electronic transfers or increased cash).
- Effective February 2014: two free ATM withdrawals per month not exceeding in total HUF 150,000 (about €450).
- Current tax rate: 0.3 percent for financial transactions and 0.6 percent for cash withdrawals (not covered by exemptions) that are above HUF 20,000 by physical persons.
- The tax is capped at HUF 6,000 (about €19) per transaction (but no cap on large cash withdrawals).
- Tax on payments by credit cards: flat fee of HUF 800 per card per year (HUF 500 in the case of the special contactless cards).
- Banks are not allowed to directly charge the client for the financial transaction tax on ATM withdrawals, but they recover it in other ways.
- Total revenue from the financial transaction tax amounts to about 0.5 percent of GDP, of which the bulk are on corporate transactions.
- Beginning 2019: all transactions by individuals below HUF 20,000 were exempted to promote the forthcoming instant retail payment system.
- Basic econometric tests suggest a structural break in currency in circulation in percent of GDP just before the financial transaction tax was introduced, as the population anticipated the tax and tried to avoid its impact.

### Shadow economy and compliance measures
- September 2014: electronic cash registers with remote audit capability became mandatory; coverage broadened over time.
- Since July 2018: all VAT registered taxpayers must submit invoices with at least HUF 100,000 VAT content in real-time.
- These measures help shrink the shadow economy and the use of cash; VAT revenue collection has consistently surprised on the upside in recent years.
- Medina and Schneider (2018) estimated the share of the shadow economy declined from about 25 percent of GDP in 2000 to about 20 percent in 2015.

### Payment behavior and instruments
- Cash primarily used by households, SMEs, and even larger corporations.
- Electronic cash register data show the share of cash transactions (volume and value) is gradually declining but still accounts for the majority.
- Ilyés and Varga (2015): preference for cash higher among those with only primary education, the young and elderly, the unemployed, students, and the rural population.
- 2017 survey: about 73 percent of surveyed Hungarian micro-, small-, and medium-sized enterprises reported that the financial transaction tax did not affect their payment practices (Belházy et al., 2018).

Table: Electronic Cash-Register Transactions, 2015–2017 (Percent, unless otherwise indicated)
- Number of transactions, billions: 2015 3.63 2016 3.74 2017 3.82
  - Cash payments: 90.0 87.7 84.8
  - Card purchases: 8.7 10.4 12.6
  - Other payments: 2.5 3.1 3.1
- Value of transactions, HUF billions: 2015 9,134 2016 9,780 2017 11,011
  - Cash payments: 74.3 71.5 67.8
  - Card purchases: 21.7 23.7 25.7
  - Other payments: 4.0 4.8 6.5
(Source: Magyar Nemzeti Bank. Reproduced from MNB (2019B). Note: sums of shares may exceed 100 percent due to multiple payment methods.)

### Instant retail payment system
- Planned introduction: March 2020.
- Coverage: credit transfers up to HUF 10 million (€31,250).
- Settlement: within 5 seconds (compared with the 10 seconds being the European maximum benchmark).
- Access requirement: mobile phone number within the EEA or an email address, and a domestic tax identification number.
- System is mandatory for all domestic banks.
- To the extent pricing is appealing and reliability proven, it should help reduce cash transactions.
- Transactions over HUF 20,000 will remain subject to the financial transaction tax, which may impede success.

### Distribution of banknote denominations (savings motive)
- Share of the volume (value) of the two largest denominations — HUF 20,000 (€60) and HUF 10,000 (€30) — increased since 2010 from 56 (91) to almost 70 (over 94) percent of all issued banknotes.
- These denominations are within the typically recommended range and are smaller than the large denominations in Switzerland (CHF 1,000), the Euro Area (€100), and the USA ($100).

### Retail government bond (MÁP+)
- Intended to absorb cash; thus far limited effect.
- MNB estimates less than 10 percent of purchased MÁP+ have substituted cash.
- From June to end-September (2019), total issued MÁP+ amounted to about 4½ percent of GDP.
- MÁP+ is a 5-year bond with the annual average yield of about 5 percent.
- MÁP+ introduced in June 2019; impact on cash could become more pronounced later.

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### Stylized Facts and Empirical Correlations for Hungary

### Income, interest rates, and inflation
- GDP per capita in Euros (deflated by Euro Area inflation) has increased by over 50 percent (24 percent) since 2005, while:
  - Cash in circulation in percent of GDP has almost doubled.
  - Cash in Euros per capita has almost tripled.
- Currency in percent of broad money appears correlated with real GDP growth per capita, particularly after the global financial crisis; may also reflect lower interest rates and inflation.

### Interest rates
- Nominal interest rates have been declining in Hungary, coinciding with higher cash holdings.
- Declines occurred after the transition to a market economy and again as the recovery following the global financial crisis gained traction.
- Marked shift from savings deposits to current accounts noted.

### Inflation
- Inflation declined after the transition and further after the global financial crisis; lower inflation reduces opportunity cost of holding cash and can increase cash holdings.

### Real interest rates
- Real interest rates declined, particularly since 2016, enhancing incentives to hold cash compared to bank deposits.
- Hungary’s real interest rate is currently lower than in Sweden and the Euro Area.
- Nominal interest rates and inflation began to decline in 2011, but real interest rates became negative only in late 2016.
- Cash in circulation began to accelerate in late 2012; growth began to slowly decelerate around 2016. The 2013 acceleration coincided with the financial transaction tax introduction; the later deceleration could reflect efforts to reduce the shadow economy.

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*Source: IMF — Hungary country material reproduced from the supplied content unit.*

### 19.      Following the literature, we estimated the impact of traditional factors and policy

### 1hunea2019002 - 19.      Following the literature, we estimated the impact of traditional factors and policy

### Methodology and data
- Applied a generic equation (3) following Jobst and Stix (2017) to a small panel of EU countries and to individual country data for the 2000–2018 period.
- Panel included Bulgaria, Croatia, Poland, Romania, Czech Republic, Sweden, Norway, Denmark, the UK, and Hungary.
- Primary dependent variable: natural logarithm of currency in circulation in per capita terms (CurrencyR).
- Income proxies used: real GDP per capita; GDP per capita in Euros deflated with EA CPI; GDP per capita adjusted for purchasing power (PPP adjusted).
- Interest rate proxies used: 6-month money market rate, 5-year government bond rate, bank deposit rate. Real rates (6-month money market rate deflated by headline CPI) also considered.
- Inflation measure: national consumer price index (CPI).
- Governance, socio-economic and demographic controls: control of corruption, rule of law, regulatory quality, and other factors indicated in Table 1.
- Robustness checks: alternative cash indicators including currency in circulation deflated by CPI per capita, Euros per capita, percent of GDP, and percent of broad money.

### Panel regression results (Fixed effects, 2000–2018)
- Income elasticity: positive and significant.
- Semi interest rate elasticity: negative but not always significant.
- Inflation: ambiguous impact; not significant and sometimes slightly positive or negative depending on specification.
- Systemic bank crises: small and not statistically significant.
- Governance indicators (rule of law, regulatory quality, control of corruption): appeared to reduce demand for cash but were not statistically significant in the panel.
- Demographic and socio-economic factors: assumed slow-moving and largely captured by fixed effects; not investigated further.

- Key coefficients and statistics reported (panel, fixed effect):
  - IncomeR: 1.69***, 1.73***, 1.52***, 1.51***, 1.59***
  - Interest: -0.02**, -0.02**, 0.00, -0.02**, -0.02**
  - Inflation: 0.00**, 0.00**, -0.02, -0.02, -0.03*
  - Bank Crises: 0.07, 0.03, 0.04, 0.01
  - Corruption: -0.18
  - Law: -0.12
  - RegulatoryQ: -0.47
  - N: 214, 214, 176, 176, 176
  - R2_Adjusted: 0.75, 0.75, 0.75, 0.74, 0.77
  - Legend: * p<.1; ** p<.05; *** p<.01
  - Definitions: CurrencyR = Natural logarithm of real currency holdings per capita; IncomeR = Natural logarithm of real income per capita; Interest = Short‐term interest rate; Inflation = CPI inflation; BankCrises = Systematic bank crises; Corruption = Control of corruption; Law = Rule of law; RegulatoryQ = Regulatory quality.

### Hungary: Country-specific OLS results (2000–2018)
- Income effect: strong and positive.
- Interest rate effect: negative and significant.
- Inflation: estimated to be slightly positive (contrasting with panel results).
- Governance indices: high and significant response of cash demand to control of corruption index; somewhat lower response to rule of law index.
- Structural break analysis around 2013 (financial transaction tax introduced in 2013) shows higher responsiveness of cash demand to income after 2012.

- Key coefficients and statistics reported (Hungary OLS):
  - CurrencyR — dependent variable.
  - IncomeR: 1.13***
  - Interest: -0.02**
  - Inflation: 0.02**
  - IncomeR * After_2013_DUMMY: 0.02**
  - Interest * After_2013_DUMMY: -0.01
  - Inflation * After_2013_DUMMY: -0.02
  - Corruption: -0.50**
  - Law: -0.9
  - N: 18
  - R2_Adjusted: 0.98
  - Legend: * p<.1; ** p<.05; *** p<.01
  - After_2013_DUMMY = Dummy variable indicating years 2013 and beyond.

### Impact of the financial transaction tax (FFT)
- Expanded equation (3) with interaction terms between standard explanatory variables and a dummy for years 2013 and beyond to capture the impact of the financial transaction tax (introduced in 2013).
- Figure 7 comparison:
  - Plotted real currency in circulation per capita (actual) vs fitted line based on coefficients estimated on data from 2000–2012 (i.e., without FFT).
  - The difference between the two lines is about HUF 100,000 per capita.
  - Graph axis labels indicate Real Demand for Cash per Capita in Thousand HUF and years 2013–2018 with values spanning 900 to 1,700 (thousand HUF).
- Interpretation: the financial transaction tax contributed to a higher use of cash and coincided with the identified structural break around 2013.

### Conclusions and policy implications
- A relatively modest change in taxes and incentives (the financial transaction tax) can significantly influence payment behavior.
- In addition to income per capita, interest rates, and inflation, the financial transaction tax played a significant role in explaining the increase in cash in circulation in Hungary.
- Cash in percent of GDP began to accelerate after the global financial crisis but "really took off" around the introduction of the financial transaction tax beginning 2013; statistical evidence indicates a clear structural break at that time.
- The increase in cash use appears to have come at the cost of generally more efficient non-cash alternatives; improved tax administration in recent years may explain why the trend has been slowly decelerating.
- International experience: use of cash is persistent despite development of more efficient alternatives unless strong policies to promote non-cash are implemented (Jobst and Stix, 2017; Bech et al., 2018).
- Widespread use of paper currency may impede development of the financial sector and non-cash payment systems by raising the transaction cost of the economy and hindering formalization of the grey economy.
- Policy relevance for Hungary: uptake of the envisaged instant retail payment system will be important, noting that only transactions below HUF 20,000 are exempted from the financial transaction tax.

*Source: IMF staff calculations and analysis, 1hunea2019002.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1hunea2019002.pdf_