Economy
Hungarian gov't keen to improve relationship with banks, c.bank on board
They were here
Last week, economists from Morgan Stanley visited Budapest, Warsaw and Bucharest, during which trip they met local experts, government and central bank officials and political observers. The analysts noted that each country that they visited is undergoing an interesting transition.The trip note was published on Wednesday. As regards, Hungary, they noted there are “plenty of buffers", but it is the banking sector that holds the key to sustainable growth.
“Hungary’s key transition will be from a credit-less recovery to one where growth is perhaps slower (around 2-2.5%Y) but credit aggregates recover and the relationship between the banking system and the authorities is on the mend."
Pasquale Diana, a London-based economists covering CEEMEA, noted early in the trip note that
if this transition can be accomplished successfully, Hungary’s medium-term growth and rating prospects should improve, with positive implications for the forint.
What about the forint?
Following the visits, Diana stills believe that the National Bank of Hungary (NBH) is “very dovish and it may well look to ease policy further from here."He thinks that the central bank will seek to keep policy loose, or even ease it further. This may well happen via its lending programmes, though he would not rule out cuts in the policy rate post-ECB.
The key goal of the central bank is to keep policy as expansionary as the inflation target will allow. And in the process, the NBH wants to restart the credit channel, particularly in the SME sector, he noted.
Recently, the NBH decided to extend its forward guidance and indicate that its policy rate would remain on hold “over the entire forecast horizon". Moreover, the bank recently announced a new package of measures aimed at boosting lending to SMEs, called GSP (Growth-Supportive Program).
Diana said that their conversations with locals confirmed their initial impression that “the programme is rather generous to the banks in some of its key features.". For instance:
- It allows banks to have access to up to HUF 1,000 billion of interest rate swaps, and invest only a quarter of that into new loans. The rest could go anywhere, including HGBs.
- It allows bank to park up to HUF 500 billion in a preferential deposit facility, a liquidity buffer which pays the base rate. Note this amount is double what the NBH expects to be created in new loans, and is a sweetener to participate in the scheme.
- Despite initial suggestions to the contrary, it appears that the cut in the bank tax will be universal, and it will not be conditional on increased SME lending.
While some argue that a flatter curve and a weaker HUF are key goals for the central bank, Morgan Stanely’s economists think they would be only welcome side-effects of its overall dovish stance.
“If the central bank really decided that a flatter yield curve becomes a primary policy goal (rather than a side-effect), we would expect it to tweak the maturity profile of its interest rate swaps programme in order to boost investor purchases of certain maturities," Diana said.
He also noted that on the FX, the views in Budapest appeared rather contradictory to them: “The prevailing view among local players is that the central bank views itself as having a very broad mandate. To justify the broad interpretation of its mandate, the central bank would likely prefer a weaker HUF because it would boost the local currency value of its FX reserves and allow it to post a profit."
Morgan Stanley’s analysts found most of the locals quite constructive on HUF on basic valuation grounds. Diana noted that Hungary’s current account position is still very strong and the overall Balance of Payments “looks solid enough to withstand large financial outflows like the ones witnessed in the HGB market over the last few months."
Should these outflows stop, the pressure would be on HUF to appreciate, given the huge trade surplus.
“In short, there is a disconnect between a perceived desire by the monetary authorities to see a weaker HUF and the underlying case for a stronger HUF: We are firmly in the second camp and continue to think that HUF will strengthen over time," Diana added.
Has the relationship with the banks turned the corner?
MS economists have also addressed the relationship between the cabinet and local banks. For them it seems that the government is “keener to ensure that the relationship with the banking system improves from here. And while occasionally NBH rhetoric has been harsher, the GSP looks pretty enticing from the banks’ point of view, and likely the outcome of greater collaboration with the banking system than in previous episodes."The background to this is that the government badly needs growth to continue, Diana said.
“Thus far, a combination of strong exports, a big boost from EU funds and the temporary impact of the FGS (Funding for Growth Scheme) have kept the Hungarian economy growing above 3%Y since 2013, very strong by its standards. However, with several temporary supports (EU funds, FGS) fading next year, it will be difficult for Hungary to grow much above 2%Y without help from the local banks."
János Lázár, the Prime Minister’s chief of staff, has also acknowledged this several times.
“Hence, the government is keen to improve the relationship and, despite its occasionally harsh rhetoric, the NBH is probably on the same page," the economist added.
In their meetings, the upcoming ruling of the Constitutional Court on the Quaestor case came up repeatedly as a risk event, Diana noted.
The court on Tuesday threw out parts of the law settling the brokerage failures and the compensation of the victims. Diana reminded that banks view the government legislation that requires them to shift the burden from the Quaestor bankruptcy onto the banks as a violation of the EBRD MoU signed earlier this year.
“The ruling, which came out yesterday, suggests that the government will have to rethink parts of the legislation.
Whereas new legislation can take many forms and not all of them will necessarily be favourable to the banks, on the margin Diana feels the banks will greet the Court’s ruling with some optimism.
“New legislation which is more favourable to the banks would entail some costs for the budget probably, but also remove one of the final remaining uncertainties for Hungarian banks and possibly pave the way to a better relationship with the government," he said.On this topic, Diana argues that the strained relationship between the Fidesz government and the banks which started in 2010 was born out of necessity as much as ideology.
“The new government rushed to introduce a new tax regime which, together with disappointing macro performance, created a large fiscal shortfall. This in turn created the need to impose sectoral taxes, most heavily on the banking system. The rationale was that the banks were the only ones would could pay; moreover, they should shoulder the burden of the adjustment, given that they had contributed to creating the crisis," he said.
In Diana’s view,
anti-bank rhetoric is much more muted today, and the government’s focus is on the refugee crisis. [...]The government seems much more preoccupied by issues of social cohesion and the migrant crisis, rather than putting effort into confronting the banks.
“It seems, if anything, to be confined to parts of the NBH management which are particularly sensitive to banks not extending credit generously enough to SMEs. However, the government has stated clearly that the upcoming bank tax is unconditional and therefore banks which do not increase their balance sheet will still see their tax burden fall," he added.First time in 25 years
On the funding side, the Government Debt Management Agency’s (ÁKK) overall strategy is to lower risks for the bond market, and make it structurally safer and less prone to international shocks, like tighter money in the US or big outflows from non-residents, Diana said.He highlighted that the ÁKK has a powerful ally in its quest to achieve a structurally less volatile bond market: the central bank, which the ÁKK acts in close cooperation with.
“The self-financing programme initiated in 2014 has greatly helped to lower the non-resident share of HGB holders to around a third, which is probably not far from where ÁKK would like it to see," the analyst said.
He also noted that greater local demand has also helped the ÁKK to fund increasingly in local currency, so that the FX share in government debt now stands at 27% (34% including FX loans) and should fall to below 25% in 2018-19, the lowest level in 25 years.
Diana thinks that ÁKK will keep a strong bias to issue in local currency.
As regards funding it is of key importance how much demand there can be from locals for HGBs.
Diana said this is a difficult question to answer, with many moving parts.
“The upcoming changes to the LCR (liquidity coverage ratio) in April 2016 are supposed to create a stronger bid for government securities," he said.
The economist also noted that in their meetings, some locals suggested that banks might be close to fulfilling their LCR requirement already, but this is of course a moving target. (For instance, banks’ holdings of 2-week deposits will have to fall by another HUF 1 trillion between now and year-end, which means they may be in a position to have to buy more bonds to keep the ratio stable.)
“More broadly, one of the basic reasons behind the self-financing scheme was the NBH’s observation that Hungarian banks’ ownership of the local bond market was lower than its regional peers, and they had scope to buy more," Diana said.
However, another way to look at this, he added, is how much government bonds local banks have as a percentage of their total assets.
In Hungary, given the large size of the market and the fact that loan growth has been suppressed, this ratio has been rising steadily over the last year and is now at almost 20%, the highest since 2002.
Seen in this light, it’s not obvious that banks have huge room to continue to buy HGBs, especially if the idea is that they grow their loan books. That said, AKK could of course try to tap the retail market more aggressively, too.
