Hungary central bank addresses concerns about foreign exchange reserves

The issue of FX reserves abruptly shifted into focus when the central bank announced last Friday, among other measures, that it will directly exchange forint into euro for energy importing companies, alleviating the pressure on the FX market from an oversupply of HUF, and simultaneously protecting the national currency from further depreciation.

Daily newspaper Népszava reported on Wednesday that at the end of last month the value of foreign exchange reserves stood at 38.74 billion euros, the highest level since September 2011, when the reserves were only EUR 22 million larger.

Of the reserves, the gold reserve amounted to €5.2 billion, while liquid foreign currency assets that can be deployed quickly amounted to €30.7 billion and the country's IMF quota totalled €2.4 billion, which is also part of the reserve, the daily said, adding that this reserve will play a major role in the coming months.

Read more about the latest monetary policy steps by the MNB at the links below:

According to analysts at OTP,

converting the energy bill will cost the mnb EUR 4-5 billion (huf 1,600-2,000 bn) by the end of the year.

OTP's economists also point out that the price of gas on the Dutch gas exchange (TTF) has declined since the peak in August (the price of gas peaked at EUR 350/MWh, now the price is around EUR 120), which reduces the demand for foreign currency and, not least, the current account deficit.

OTP's analysts believe the MNB's FX reserves could likely fall less than EUR 4-5 billion, as EU fund inflows are usually strong in the last quarter of the year, and they expect at least EUR 2 bn inflow for Q4 2022 from the EU's previous seven-year budget, which is not endangered by the current tensions and the withholding of EU funds.

The paper also points out that funds from the EU are an important element of the reserves, and are also exchanged outside the market by the central bank, with the euro being placed in the reserve.

The paper contacted the MNB about the foreign exchange reserve, which said

the Hungarian central bank's foreign exchange reserves are in line with the key indicators for reserve adequacy:

At the end of the second quarter of 2022, foreign exchange reserves in excess of short-term external debt amounted to €5 billion.

"One of the objectives of holding foreign exchange reserves is to ensure that the MNB is able to adjust the supply and demand conditions on the foreign exchange market to the central bank's objectives in a rapidly changing environment such as the current one," the bank said.

In its reply, the MNB also recalled that in recent years it has "established an international safety net of bilateral agreements with several international organisations and central banks, which provide additional foreign exchange liquidity over and above the central bank's foreign reserves. Relations with international organisations and peer banks are still active and are available to the MNB in case of need, allowing it to increase its reserves by several billion euros immediately."

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