Economy 6 July 2023, 2:03pm

Time bomb of Hungarian budget to be neutralised in one fell swoop

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According to the National Bank of Hungary (MNB), negative equity in itself is not a constraint on the conduct of monetary policy. This implies that they will move in this direction to solve the problem that the central bank ended last year with a loss of more than HUF 400 billion, which the budget would have to offset. This year's deficit of HUF 1,500-2,000 billion is also to be borne by the budget, but not at once, rather over a five-year period.

A gyenge forinttal teszteli a piac az MNB hitelességét

In recent weeks, we have written several times about the potential burden of the MNB's loss on the 2024 budget. The central bank ended the year with a deficit of more than HUF 400 billion last year, but even so, its capital remained positive, so there is no need for state intervention for the time being. However, this year's loss could be as high as HUF 1,000-1,500 billion, while the capital loss could be around HUF 2,000 billion due to the HUF exchange rate equalisation reserve. The first tranche should start to be paid this year, and the losses of €1000-1500 billion should start to be compensate next year.

Under the current regulation,

the budget would need to recapitalise the central bank by HUF 400 billion in each of the following five years due to the loss the MNB is expected to incur in 2023.

However, it is not certain that this is the path that the government and the central bank will take. At least, this is the conclusion of a joint opinion piece by Zsolt Kuti, the MNB’s Executive Director responsible for Monetary Policy, Financial Analysis and Statistics, and Csaba Balogh, Head of Financial Market Analysis Department, published by business news portal Vg.hu on Thursday.

Negative central bank equity is not in itself a constraint on the conduct of monetary policy. On this basis, the National Bank of Hungary considers that it will not need to replenish capital in the coming years to operate efficiently, and will be able to compensate for its negative equity with the positive results expected in the years ahead,

they wrote in their opinion piece. They added that in line with this, they have submitted to the government their proposals for changes to the rules on capital replenishment, which are identical in content to those submitted last year.

This would not be unprecedented in the European Union, and as MNB Deputy Governor Barnabas Virág has already said, "there are several central banks that can operate credibly with negative equity in a transitional period."

As we wrote earlier, in some cases, the central bank is allowed to operate with temporarily negative equity. However, a study by the International Monetary Fund (IMF) underlines that if the independence of a central bank is to be guaranteed, it is important to replenish capital.

Gergely Gulyás, the PM's chief of staff, told journalists on Thursday that the government supports the idea of letting the central bank operate with negative equity, but noted that the European Central bank will have to be notified of this.

As we are talking about a technical profit or loss, I see room for the future profit of the central bank to offset the current loss. The central bank's capital should be compensated from the budget in the case of a longer period of losses at most, Gulyás said.

He also said that a longer period of loss would be set at 5 years, in line with the current Central Bank Act.