There has never been a more massive withdrawal of capital in a span of one month in Hungary than in August, the staff of the National Bank of Hungary (NBH) has confirmed Portfolio.hu's assumption made on the basis of the bank's latest chart-pack. Net forint sales of non-resident investors amounted to nearly HUF 1,050 billion, while their net forint currency-swap stock rose to a historic high in August, which implies this is not a general sales spree. Another, rather odd, fact is that net forint sales by non-residents was only about two thirds of the August value even during the wildest month of capital withdrawal last summer, when the HUF depreciated by much more than in August this year. The reasons for current capital movements and those last summer are basically different, which explains why the Hungarian currency has been surprisingly stable (for some months now).
Net forint sale of non-resident investors was brutal in August and the central bank's chart-pack shows that capital withdrawal has been constant ever since April - although to a different extent. The chart on the left below also points out that the HUF regained strength in the second half of August to 255 from 260 while non-residents kept selling forint, though not as intensely as before.
The forint eased by more than 3% on monthly average to 255 in August, which is very moderate considering the intensity of capital withdrawal and the HUF's deprecation a year earlier.
The background of capital movements
The chart on the right above shows that non-residents net forint currency-swap stock rose by about HUF 800 billion in August, which serves as a very good explanation for the HUF 1,050 net forint sales. There are basically three main factors that led to the leap in the swap stock, but these cannot be specified as numerical data. The rise was the consequence of a) the increased need to cover exchange rate risk of existing assets, b) the closure of previously set forint purchase positions, c) the opening of positions against the HUF. The latter two trigger forint sales on the spot market.
Further substantial forint sales were generated by the events on the Hungarian stock market. The chart below indicates that non-residents sold some HUF 250 bn worth of papers on the Budapest Stock Exchange (BSE) in August. Meanwhile, their stock of Hungarian government securities rose by about HUF 50 bn to an all-time high of (over) HUF 3,200 (2nd chart).
The NBH staff told Portfolio.hu that the stock of non-residents' equity dropped in August despite the fact that MOL alone repurchased own shares for about HUF 500 billion. Considering how gloomy the mood has been turning on stock markets globally since the second half of July, this is not a big surprise. This serves as the main explanation for the gap between MOL's HUF 500 bn worth of buybacks and the huge, cc. HUF 700 bn, plunge of non-residents' equity holding between end-July and end-August.
When MOL started to buy back its treasury shares (22 June) there have been reports that the fuels group converted some of its foreign-currency assets into forint and the subsequent demand for forint was also moderately felt on the spot market, dealers said. This, however, probably did not help the forint (much) to retain its stability in August during the massive capital withdrawal. At least we could not get confirmation from currency dealers.
How come the HUF stood its ground?
There were basically four key factors helping the forint to ease only marginally even during major forint sales by non-residents in August.
1) Most probably, households continued taking out foreign-currency consumer and property loans. Net forint demand of the sector's net forint demand was at a new peak at more than EUR 600 m (HUF 150 bn) in July, NBH officials told Portfolio.hu.
2) In the corporate sector, the scaling down of foreign-currency deposits and foreign-currency borrowing probably continued at a weaker HUF, and we can assume that the corporate sector also acted on the FX market as a forint buyer.
3) There was no major sales pressure on the Hungarian government security market from the side of non-residents, which - among others - indicates that the Hungarian exposure of hedge funds cannot be too high. Moreover, non-residents did even increase their Hungarian exposure to the aforementioned extent.
4) Investors' exchange rate expectations could have also played a key role in the moderate weakening of the HUF. As we have pointed out in our poll of analysts before the 24 August policy meeting, a number of experts considered the easing of the forint, triggered by problems of the subprime mortgage market in the US, a temporary phenomenon. Consequently, intra-month developments did not affect long-term exchange rate expectations in merit. (While Hungary's macroeconomic fundamentals are much stronger than last summer, the forint is still fragile in regional comparison.)
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