Paper/Speech Details of Conference Program for the 20th NISPAcee Annual Conference Program Overview Public Finance Author(s) Gabor Kovacs Szechenyi Istvan University Gyor Hungary Title Borrowing of Hungarian local governments: Experience of the last two decades File Paper files are available only for conference participants, please login first. Presenter Gabor Kovacs Abstract Following the 1980s, during the process of the transition to a market economy the Hungarian local government system had to meet new challenges and expectations. Due to the decentralization process local governments’ revenues decreased significantly in real value in the last two decades, while the level and scope of services provided did not decrease at the same time. In the first place local governments, which are short of resources, had to perform probably one of their most important tasks: to develop their resource absorption and fund-raising capacity. With the increasing difficulties of the central budget, a greater share of public service provision had been transferred to the local level. Since transfers from the central budget were less and less able to cover the investment needs of local governments, there was an even stronger demand for external funds. One of the diverse methods of using outside resources is the usage of loan resources, among which resource acquisition via local government bond issues should be listed as well. In the early 1990s local governments were reluctant to use loan resources because of the over-indebtedness of the previous socialism regime, and they considered indebtedness as a sign of weakness. After an early and temporary “bond boom” in the middle of 1990’s, the size of indebtedness started to increase considerably, first in 2002, where one of the reasons was the favourable macroeconomic environment (low inflation rate, moderate interest rates). The increase was also due to the decrease of revenues deriving from privatized asset sale and the increasing investment demand could not be met by central government support. Since the EU accession in 2004 – insuring their own part in tenders - indebtedness has been increasing. The really drastic increase in volume of local government debt in Hungary started in 2006, caused primarily by the issuance of local government bonds. While up to 8 billion HUF worth of bonds were issued in 2006, the bond issuance value in 2007 nearly reached the HUF 200 billion and in 2008 exceeded this amount. From 2006 to 2009 the value of municipal bonds issued increased sevenfold and exceeded USD 1 billion. At the end of 2010 the size of financial obligations deriving from local borrowing amounted more than 4.6% of GDP. The objective of the paper is to present and analyse the main characteristics of Hungarian local government’s borrowing in the last two decades and to assess and judge the applicability of municipal bond as a local government fundraising tool reflecting the experience of the studied issues. Besides the paper makes an attempt to summarize the experiences, lessons learnt of borrowing of local authorities in Hungary and to develop some future prospects for the viability and role of municipal bonds in the finance of Hungarian local governments. The paper is also aimed at examining factors that might have been behind indebtedness, and tries to separate the effect of internal and external variables.
