MNB executive directors: International reserves may be lowered “with due caution”


Hungary’s reserves could be lowered with due caution as they exceed reference levels watched by investors and short-term external debt is trending downward, National Bank of Hungary (MNB) executive directors Márton Nagy and Dániel Palotai wrote in an article published on the official MNB website yesterday. If the reserves are reduced cautiously and gradually, taking into account the room to maneuver determined by risks, the reduction will not raise the country’s external vulnerability, the executive directors surmised.

Hungary’s external reserves are mainly affected by the debt financing transactions carried out by the Hungarian government debt manager ÁKK and by the transfers received from the European Union, according to the report.

Nagy and Palotai noted that advance repayment of the remainder of a 2008 loan to the IMF in August 2013 reduced Hungary’s international reserves by about €3 billion, but reduced short-term debt by the same amount as the loan repayment was due in less than one year. The large inflow of EU funds, most of which are paid out in forints, raised the reserves as did the foreign-bond issues carried out by ÁKK last November and in March.

International reserves stood at close to €36 billion at the end of March 2014, and they could rise slightly further regardless of the size of any further FX issue if EU transfers reach least last year’s level, the authors said. They noted that the ÁKK plans gross FX bond issues totaling €4 billion of which more than €2 billion worth of bonds had been issued in March, and maturities are planned to moderately exceed issues.

Net inflow of EU funds, including current and capital transfers, reached an all-time high at €5.38 billion last year, MNB figures show.

The part of external debt due within one year will drop this year, mainly in the second half if the maturity structure remains unchanged. Besides, the continued current account surplus could allow the drop of external debt, and, within the total, permit short-term external debt to drop further. All this could leave room for the gradual reduction of the reserves, the executive directors said, warning that the process required caution and a thorough considerations of risks and the reserves levels expected by investors.

The reserves meet the so-called Guidotti-Greenspan rule, under which they must cover short-term gross external debt expiring within one year. They stood near 34 billion at the end of 2013 when the Hungary’s short-term external debt reached €28 billion, rising €1.6 billion in the fourth quarter, as the residual maturity of some long-term government and corporate loans sank below the twelve-month mark. Reserves also compared favorably to gross external debt, which stood at €86.6 billion at the end of 2013, excluding HUF 29.8 billion in FDI-related debt.

Hungary’s reserves were in the upper half of the optimum region of a new combined indicator calculated by the International Monetary Fund in the past four years and remained there according to the MNB’s calculations for the end of 2013, and were well above the necessary level under various other indicators, Nagy and Palotai wrote.

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