MNB could change Funding For Growth conditions

MNB governor György Matolcsy announced on September 11 a decision to add another HUF 2 trillion to the “Funding For Growth” scheme and extend it until the end of 2014. The central bank made HUF 750 billion of 0% refinancing available to banks for new SME loans or the conversion of foreign currency-denominated SME loans between June and September. The second phase of the scheme will start with HUF 500 billion of refinancing, available from October 1 until the amount is depleted.

Banks may re-lend the refinancing at no more than 2.5%, well under the 3.80% base rate, and runs will be limited to ten years, as in the first phase of the scheme. However, banks will get the refinancing on a first-come, first-served basis, instead of allocation, as was earlier the case.

MTI-Econews asked the MNB to comment on the size of the programme, its effect on monetary policy, the possibility the cheap credit would push out other lending products from the market, and whether it still planned to reduce the stock of its two-week bills, thus reducing central bank losses, in the light of the massive sterilization needs.

The MNB said the amount offered under the scheme was bigger compared to similar programmes in other countries because SME loan stock in Hungary had fallen at a faster rate. It added that just one-quarter of the full HUF 2,000 billion had been opened, and rate-setters would review the conditions of the program based on the effects to monetary policy.

The new HUF 2 trillion limit, 90% of which is meant to refinance new loans, is equivalent to nearly one-third of total corporate lending stock and is two-thirds of outstanding SME loans. When launching the program in the spring, the MNB stressed its one-off, focused and limited nature, in an effort to avoid distorting the market and the development of a dual interest rate system.

The extended program will expand the liquidity of the banking system only gradually, and the two-week MNB bills, which pay the base rate, are a suitable means to soak up this excess liquidity, the MNB said when asked whether it was realistic to raise the two-week bill stock by some 50% from the current HUF 4,050 billion without raising the base rate, or parallel – as Matolcsy suggested – with lower rates.

The MNB said that it still aims to reduce Hungary's short-term external debt in cooperation with banks and the government, reduce the stock of two-week bills, thus lowering the MNB's interest risk, but aknowledged that several factors dampened the effect of that part of the scheme, the so-called “third pillar.”

At the spring launch the MNB said that less short-term external debt will reduce the need for international reserves, thus would lower the two-week bill stock. The aim was to reduce the two-week bill stock by HUF 900 billion from HUF 4.5 trillion at the end of March.

Consultation between the government and banks on solving the problem of foreign currency-denominated loans is among factors that weakened the impact of the third pillar, the MNB said. The talks forced banks to take a wait-and-see attitude with regard to their FX needs.

The other element of the pillar, shifting general government financing towards financing in forints -- is a long-term goal, and essentially falls within the government's competence. It is unrealistic to expect any progress in this area in the short term, the bank said.

Market conditions have also changed, the MNB said. And it noted that it had said already in April that lending on the back of refinancing would increase liquidity.

The two-week loan stock fell by about HUF 450 billion between March-April and the end of August. About one-third of the drop could be related to an FX swap facility launched in June connected to scheme in which banks get euros for forints from the MNB on the condition of reducing their short external liabilities by an equal amount. The stock in the facility has reached €458 million, or a little less than HUF 140 billion, to date.

Stable macroeconomic conditions, continuous risk assessment and, with inflation developing in line with the mid-term target, a steadily low base rate could deliver not only the basic aims of the MNB but would also ensure a better income position for the MNB, the communications department said regarding the losses the zero refinancing scheme would generate.

The MNB accepted the estimate that the new scheme would in itself generate a HUF 68 billion MNB loss or, including the effect of the June-August loans, an HUF 86 billion loss in the short term.

It noted, however, that the MNB losses are affected by other factors, and the higher economic growth resulting from the scheme and the resulting higher budget revenues could offset the costs. Including the effect on the other part of the economy, the balance could be clearly positive, according to the MNB.