Taking stock: MNB's financial results for H1 2023 look quite bad indeed

HUNGARY - In Brief 01 Oct 2023 by Istvan Racz

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The MNB has come forward with its H1 2023 financial report. It says the MNB had a 6-month loss of HUF999bn, mainly because of very high interest expenditure, paid primarily to domestic banks as the cost of monetary stabilisation. However, its equity stock fell by HUF1767bn in H1, to HUF1512bn or 2% of GDP by end-June, as the Bank also incurred  a very substantial additional amount of unrealised exchange losses, as a result of the forint's sharp appreciation against major currencies, especially the euro and the US dollar. In short term, the rapid buildup of the MNB's negative capital does not imply any macroeconomic problem. Even though the current central bank act requires the government to recapitalise the MNB up to its registered capital of HUF10bn in equal instalment within five years after the occurrence of any negative equity, this is going to change soon, as parliament is just in the process of amending the act so that recapitalisation is to be carried out from the MNB's future profits, rather than capital transfers by the government. This proposal has received ECB endorsement already, essentially meaning that the ECB, from which the MNB regularly borrows, accepts the Hungarian government as an appropriate guarantor of the MNB's debts owed to it. The official claim behind the proposed amendment is that the existence of negative capital is only a temporary phenomenon, which is going to be eliminated as soon as the macroeconomic situation normalises and the MNB returns to regularly generating profits, as its usual way of existence. The potential long-term problem with this is that there is absolutely no guarantee that the MNB can return to regularly generating prof...