Official FX reserves fell by €4.2bn in March, but that was a welcome event

HUNGARY - In Brief 07 Apr 2016 by Istvan Racz

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Official FX reserves fell to €27.55bn at end-March from €31.72bn in the previous month, reaching the lowest level since 2009. The cumulative decrease of FX reserves has been €2.8bn since the start of this year. However, this was nothing unexpected, and the MNB is actually looking at this development positively, regarding it as an important step towards the implementation of its de-sterilization plan. Specifically, €2.9bn of the decrease in March was due to the expiration of currency swaps between the MNB and domestic banks, which were set up in the context of the forced conversion of FX denominated mortgage and other loans in Q4 2014. As readers will remember, the total volume of those swaps, aimed to help banks to close their open FX positions, was €9.7bn. Of this amount, €6bn was still on the books at end-2015, and about half of the remaining amount expired in March. A smaller additional amount of reserve reduction was due to the redemption of a GBP0.5bn 10-year government bond on March 30. As is widely known, the MNB has no problem at all with a certain amount of decrease in its FX reserves, to the extent that the latter remain at or above the volume of the country's below one year debt payment obligations (€21-22bn) or the equivalent of three months of imports (€22-23bn). In fact, the MNB issued a forecast in late 2015, according to which it expected FX reserves to drop to €22bn by end-2016, in line with a similar decrease of the size of its monetary sterilization. The events in March are pointing in this direction, as the total size of monetary sterilization (2-week and 3-month deposits, compulsory reserves and preferential deposits together) fell no less than HUF...