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The outlook for the Hungarian economy and the forint will also be discussed at the Budapest Economic Forum conference on Thursday.
Apparently the MNB is doing something very well
In the first half of the year, the MNB made a profit of HUF 217.2 billion, more than four times the previous year’s profit of HUF 52.7 billion, according to the recently released semi-annual report. In the past ten years, there has never been an example of such a profit in six months, the next time the central bank came to it in the second half of 2019, when it made a profit of 202 billion HUF.
| Main items of MNB profit (billions of HUF) | ||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 * | |
| Net Interest Income | -94.0 | -153.6 | -49.4 | -86.3 | -42.7 | -15.6 | 10.7 | 27.1 | 49.4 | 28.6 |
| Net interest income in HUF | -312.7 | -341.2 | -231.4 | -158.5 | -93.0 | -28.4 | 11.8 | 23.6 | 30.6 | 12.3 |
| Net interest income in foreign currency | 218.7 | 187.7 | 182.0 | 72.2 | 50.3 | 12.8 | -1.1 | 3.5 | 18.8 | 16.3 |
| Profits realized in financial operations | 24.7 | -33.2 | -112.6 | -119.6 | 14.9 | 16.8 | 1.2 | -7.5 | 7.3 | 5.6 |
| Profit from exchange rate variations | 98.7 | 158.3 | 200.3 | 511.0 | 177.7 | 95.1 | 61.4 | 74.0 | 229.1 | 206.6 |
| Other factors | -15.8 | -11.3 | -12.0 | -277.7 | -55.3 | -42.0 | -35.0 | -45.8 | -31.1 | -23.6 |
| Outcome | 13.6 | -39.8 | 26.3 | 27.4 | 94.5 | 54.3 | 38.3 | 47.8 | 254.7 | 217.2 |
| Source: MNB, Portfolio | * Data from the first semester | |||||||||
Therefore, at first glance, the central bank’s profitability improved markedly, but the table above also shows that the substantial gain was entirely due to the gain recorded at the exchange rate.
The results of the central bank’s operations are determined by the following main concepts:
(1) the return on foreign exchange reserves, typically interest income,
(2) interest paid on central bank deposits,
(3) revaluation of assets in foreign currency (foreign currency reserves) due to changes in exchange rates; Y
(4) other items.
We have written more about these here. The most typical factor influencing earnings is that the central bank earns low interest income on its foreign currency-based assets (i.e. foreign exchange reserves) (1), while on the liability side it pays a fee higher base interest rate on two-week (three-month) deposits (2). In the case of (3), a distinction must be made between realized and unrealized revaluation gains.
But let’s get right online, we’ll get back to forex gains! If we look at the basic processes, there was hardly any change in the result of the MNB. Net interest income was HUF 28.3 billion after HUF 28.6 billion in the first half of last year. Within this, there was only a minimal rearrangement, forint interest income declined, while currencies rose.
There were also no major changes in the result of financial operations, the profit decreased minimally by 5.8 billion HUF compared to the first half of last year. In the case of other items, the loss of 23.6 billion HUF was barely 3,000 million higher than the previous year.
From the above, it can also be seen that the benefit recorded at the exchange rate caused the pending benefit in the MNB: this item jumped from 38.8 billion HUF a year earlier to 206.6 billion HUF.
How can the MNB cut so much into a weak florin?
We have already covered the MNB exchange rate result several times before, but it is still worth briefly summarizing where this article comes from. The central bank makes exchange rate gains when it sells euros from foreign exchange reserves. Their cost is usually less than the current market rate, and the difference between the two is recognized in results. The most common way to sell euros is for the MNB to meet the state’s currency needs, that is, the AKK repays past due foreign currency bonds and interest by exchanging euros with the central bank. Therefore, the exchange gain of the MNB basically depends on two things:
- From the state’s foreign exchange needs.
- Of the difference between the cost price and the current market price.
In the first half of the year, the forint weakened to a record level against the euro around 370, but, except for the beginning of the year, prices were constantly in the range of 345-365.
It is not known exactly when and at what exchange rate the central bank changed euros for the state, the semi-annual report indicates that on June 30, the average cost of foreign exchange reserves was 326.57 at a market price of 356, 57.
From this difference of 25 to 30 HUF, the MNB had to replace between 7 and 8 billion euros for exchange rate gains in excess of 200 billion HUF.
However, this may be realistic, as there were significant currency write-offs at the beginning of the year. According to the MNB report, in addition to ÁKK’s debt management operations, they also had to provide the necessary foreign exchange for state spending to protect against the coronavirus epidemic, which could cost between 1 and 2 billion euros (purchase of fans, purchase of other equipment) in the first semester.
Meeting the above transaction targets was done well over the period under review – read the semi-annual report.
For years, it has been clear that the MNB can post a good profit in foreign exchange, as the average cost cannot keep up with the transaction (market) rate, despite the continued weakening of the forint. Currently, the average cost of funds of 328.65 already means that
A FORINT STRONGER THAN 330 SHOULD BE UNDESIRABLE FOR THE CENTRAL BANK IN THIS RESPECT, BECAUSE IT WOULD NOT ONLY LOSE ITS PROFIT, BUT IT WOULD CONTINUE TO CHANGE THE EURO WITH A LOSS.
However, we have come a long way since this in recent months.
In addition to the realized exchange gain, the forint exchange rate compensation reserve includes the unrealized exchange gain of the MNB. During the weakening of the forint, the central bank may record unrealized gains on foreign exchange reserves, as their value expressed in forint will increase. This compensation reserve increased by HUF 302.7 billion in one year, reaching HUF 490.5 billion at the end of June due to the weakening of the forint.
There have been examples of this before, but the MNB may have felt a bit overwhelmed
We mentioned at the beginning of the article that the current record exchange rate result in the history of the MNB is not extraordinary, in 2014 it was higher in both semesters. At the time, however, this did not show up in the central bank’s earnings, as the Pallas Athena Foundations, then founded, were recapitalized as other expenses.
Furthermore, between 2013 and 15, the jump in foreign exchange gains was so surprising that it became suspicious. The most obvious explanation at the time may have been that the central bank deliberately changed more forints into forints than it actually needed. Once the foreign exchange requirement was settled, the remaining part was converted back to euros at the current exchange rate. That is, just to make additional profit, the transactions made a significant part of the exchange rate profit. And from this additional profit, he was later able to raise capital from the foundations. Subsequently, the central bank did not deny that there was a difference between the foreign exchange requirement and the converted reserve, at most the exact amount of the difference was questioned.
We cannot speak of a similar one now, as the conversion need of 7-8 billion euros does not appear to be exceptionally high in the crisis, especially when we add the need for resources for crisis management. And so far, there is no outstanding expense in the rest of the results. Therefore, it is likely that only the weakening of the forint and the increase in demand for foreign exchange from the state are what really caused the outstanding gains in the MNB.
Figures for the first half of the year also show that the central bank made almost as much profit in half a year as the 254.7 billion profit in 2019. And if the favorable trend for the central bank persists, then In the spring of 2021, the MNB will once again have the opportunity to pay a significant dividend to the budget.
Cover image: Getty Images
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