MNB Deputy Governor: It's not over, Hungarian cenbank toolkit is full
- the MPC has left interest rates on hold today, as expected.
- to ease strains in funding markets caused by the coronavirus pandemic, the MNB has decided to take further liquidity measures;
- it will introduce a long-term, i.e. three, six and twelve-month and three and five-year, collateralised lending facility of unlimited total amount at fixed interest rates, and;
- by suspending the sanctions on reserve deficiency, it will exempt banks from complying with reserve requirements;
- the Council left the average amount of liquidity to be crowded out for the second quarter of 2020 unchanged at a minimum of HUF 300-500 billion, but signalled that it could ease monetary conditions via this tool.
Highlights of Nagy’s remarks:
About the growth outlook
The 2-3% growth central bank projects may not be the most probable outcome. Growth could be lower but if we manage the crisis of confidence by effective monetary and fiscal tools, there could be fast recovery, a V-shaped crisis.
It’s not over yet
The series of liquidity-boosting measures is not over yet, more steps will be taken. These measures are helping the four sectors of the economy by managing liquidity issues. The MNB is not targeting specific markets, the banking system can decide what to do with the liquidity: it may lend to corporates and households or buy government securities. (Editor’s note: we believe the latter will be dominant.)
Forint still no worry
As we used to say, the MNB has no exchange rate target. In the current situation, the forint depreciates amidst huge volatility, while the HUF is the least volatile currency in the region in the current environment.
How will Hungary grow by 2% in the middle of a European recession?
The current estimates are characterised by major fears and panic therefore the question is how fast and how effectively the MNB can mitigate the crisis of confidence in Hungary, Nagy replied when asked how could the Hungarian economy grow by 2.0% amidst recession all over Europe.
No fear of inflation either
The MNB does not believe it will be a problem to bring back inflation to 3.0% (the bank’s medium-term target) which makes it possible to stimulate the economy.
Troubled businesses should be protected first
The growth-stimulating measures enjoy a priority even in respect of central bank tools. What needs to be solved now is to prevent them from going under and capacities to be lowered. The sectors hit the hardest [by COVID-19] need to be shielded first and growth can be stimulated only afterwards.
By all means necessary
The MNB is ready to deploy all available means to ensure appropriate liquidity for corporations, households, the budget or the financial system. If necessary, we’ll take additional liquidity-boosting measures.
Freeing reserves may also boost liquidity
The MNB released domestic counterparty credit institutions, subject to reserve requirements, from the reserve requirement until a further decision is made. There is about HUF 250 bn in such reserves that may be freed, thus boosting liquidity. The first repo tender will be held on Wednesday.
Affecting the bond market
By the new tool the central bank will be able to influence the government security market, and push yields lower on the long end of the curve; we’ve seen that happening today.
The way of achieving that is that banks may use any collateral for repo deals, even government securities. It’s important that the interest is fixed on the whole tenure, it is calculable so there is no uncertainty whatsoever.
80% of borrowers to use the repayment moratorium
The MNB has come to the conclusion that the current liquidity crisis needs to be managed not only in the banking system, but also in the corporate and household segments, and then in the general government too. The loan repayment moratorium for corporations and retail borrowers is a huge break, and
the MNB expects more than 80% of the borrowers to use this moratorium and suspend repayments until the end of the year.
This is a temporary liquidity relief, for the principal debts will not be wiped clean. This liquidity shock is to be absorbed by the central bank. There’s HUF 3.6 trillion worth of debt to be affected by the moratorium, and even an 80% usage would result in HUF 2.9 trillion.
On a systemic level liquidity will not decrease as households will spend their savings achieved this way and this money will find its way back to the banking system. The central bank is ready to manage this shock on the level of individual banks.
As regards the economic impact it is key how many of them will use the moratorium, given that their consumption can give a boost to economic growth.
The MNB would like if the interest not paid during the moratorium was distributed evenly for the period left until expiry.
If every single borrower makes use of the moratorium, the income loss for the whole banking system will be about HUF 50 billion.
Current account balance
The current account balance currently shows a moderate deficit which will remain this way this year. The balance might be improved to 0% next year and most likely to a surplus in 2022.
Current oil price will not be permanent
We should not expect the current low oil prices to remain with us very long. Once the economies are restarted demand could pick up again. Therefore inflation, after a decline this year, could accelerate next year again. Annual average CPI could drop sharply to 2.0% in 2020 and then rise to 3.0-3.5% in 2021.
Risk scenario as of end-summer
In its baseline scenario the MNB projects 2.3% GDP growth for this year and well over 5.0% for 2021. However, a lot needs to be done to achieve these.
If the pandemic is still with us at the end of the summer or early autumn, we’ll be talking about a risk scenario and growth could be a lot smaller.
Everything must be done to make this crisis V-shaped
The bank trusts it will be V-shaped recovery, i.e. moderate growth in 2020 and sharp growth next year. This is the best scenario there is, a U-shaped or L-shaped crisis would already exert a negative impact on Hungary’s potential GDP too.
Of course, a lot depends on how the current epidemiological emergency situation will be in place, because it is affecting how long plants will be closed along with the labour market.
About fiscal stimulus packages
Fiscal policy comes up with loan and guarantee programmes and there are also targeted schemes aimed at households, plus corporations are also attempted to be propped up. Some countries are starting to announce stage 2, namely the enhancement of investments.
There is no hard data in Hungary at the moment that would suggest that certain sectors are fighting for survival, but some reports do indicate major hardships, including the suspension of production at automotive companies, disruptions in supply chains or the start of layoffs.
Tourism and catering have been hit really hard indeed. Hotel reservations declined markedly and this 20-30% occupancy could drop even to 10% in the coming weeks.
Could be worse than the Lehman crisis
Global tourism has practically come to a halt, this kind of contraction has not been seen for a long time. It could easily be worse than the post-Lehman crisis. Global outlooks have been constantly revised downwardly.
Every sector will be affected
We are currently in a protective phase, the goal is to shield corporations and households from the negative impacts of the coronavirus. Vital macroeconomic data are to be received about industrial output, the labour market, GDP and finally Hungary’s balance indices will also be affected by the crisis.
The coronavirus can reach every sector, but some will be affected sooner, such as tourism, transport, the automotive sector and later electronics.
There is a crisis of confidence
We are in a crisis of confidence that has evolved into a financial and economic crisis, as its impact is now felt on the markets and affected the behaviour of corporations.
This will spill over to the labour market, consumption, corporates than markets. This circular effect will last until the end of the pandemic or until economic policy severs the points of contact.
