Nomura on Hungary: forex loan policy a mess

Under the eye-catching title “MPC dovish, FX mortgage policy a mess,” Nomura fairly well went off on some major shortcomings in Hungary’s economic policy areas. Excerpts from the briefing follow.

• “Key Hungarian policy areas are split in two at present: FX mortgage reform seems an unwieldy mess, albeit one that can perhaps start to turn around quickly after court rulings; while monetary policy has a clearly unchanged focus of wanting to cut rates further if at all possible, with the rhetoric of ‘we are different.’”

• “…we are still concerned about medium-term growth, the lack of foreign direct investment (FDI) and too-low interest rates. Monetary policy looks set to take a great risk that can only work under perfect goldilocks conditions. Such a backdrop may be in place by the time of this month’s meeting, but could soon pass, leaving the forint further exposed in the future.”

• “…[economic] growth is being sustained by a combination of factors – abnormally low inflation that should reverse through this year and excluding FGS temporary impacts, EU structural funds, public works jobs and a lack of demand for debt likely to continue even as balance sheets are cleansed – so there is a fundamental underlying lack of dynamism in the economy. This credit demand point, combined with the inability of the banking system to intermediate this financing capacity is crucial, we believe.”

• “The room and need to cut rates further on the domestic macro front remains clear. The officials we spoke to see inflation remaining subdued for an extended period together with a negative output gap throughout the MNB’s forecast horizon. … Rhetoric will clearly be a key part of the strategy to open up the space to cut, though the MNB does not consider that that is what it has been doing recently.”

• “There are indications that the MPC may see 2.50% as a base for rates given FGS rates at that level, given Poland also at 2.50%, given also a concept of real rates off core CPI being zero to slightly negative too at that level. MPC members seem to split on the pace of cuts and depth of cycle depending on their views of how to weight domestic versus external issues…”

• “We were surprised at the difficulties in the policy-making process regarding FX mortgage reform. It seems to be that after the collapse of the negotiations with the banks, many other areas of the state have had their say over the outcome of the reforms with little attempts at coordination before the court rulings.”

• “The government and particularly the MNB are actively considering the future shape of the banking sector. A blueprint is being discussed by the MNB and is driving a lot of the recent rhetoric on the subject.

“The end point seems clear, the ability to get there logistically much less so. The MNB has so much power in this area but a combination of EU rules and lack of centralised leadership across the state means there is no movement at this time. Equally the MFB (development bank) has so much spare capacity to undertake a much greater role in the economy and in the restructuring of the banking sector but has not yet received any instruction from government on this front. It is very much a sleeping giant – though it has been involved with the government in transforming the energy sector.”

• “Bank exits, meanwhile, are on everyone's lips. Foreign banks are caught between their obligations (under EU law and Vienna II among other things) to keep subsidiaries capitalised – and so capital injections by some into year-end – and the lack of any profit in the outlook. OTP and others are looking at acquisition very actively. However, the key hurdles at present are how to deal with the huge stock of parent-subsidiary lending, tax issues and other legal complications more than simply the cost of restructuring or asset valuation and policy uncertainty. As with FX mortgage restructuring, therefore, time is going to be key even if the end point is clear. The government and MNB are unlikely to be ready to provide logistics until there is a broader policy framework agreement, so we do not believe the kicker is there yet.”

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