The structure of external financing: Is there a reason to worry about financing through debt?

Hungary’s external balance indicators improved a great deal in 2007. Simultaneously, however, the external debt ratio also rose which, in an international climate of uncertainty stemming from the sub-prime crisis, drew investors’ attention to the structure of the country’s external financing. This study argues that the recent increase in debt-creating external financing does not necessarily increase risks associated with sustainability. On the one hand, the record rise in debt-creating financing in 2007 is largely due to one-off items. On the other hand, the waning significance of non-debt-creating financing is not attributable to declining inflows but rather mostly to residents’ stepped up capital exports, which is partly a result of the development in the institutional investor sector, and partly of the foreign expansion of a few large resident companies. The picture becomes even more intricate as according to recent research, the advantages generally associated with non-debt-creating financing are not always supported by findings, and empirical experience indicates that more developed countries are often characterised by a higher share of debt-type external liabilities. Naturally, and irrespectively of the structure of financing, Hungary’s high level of net foreign liabilities in an international comparison continues to be a strong risk factor.