National Bank of Hungary deputy-governor urges more nuanced assessment of FX debt

National Bank of Hungary deputy-governor Márton Nagy suggested investors should take a more nuanced approach to assess the size of Hungary’s foreign currency debt and its impact on the country’s vulnerability in a paper published on the central bank website on Friday.

Nagy said analyses by investment banks and institutions such as the Institute of International Finance (IIF) which are used as source material for financial media, such as The Wall Street Journal, “are often too vague” and compare disparate factors.

“Suitable for deception, these analyses could be especially harmful in the current severe market situation, when a distorted view perceived by the investors could have major influence on the opinion about the stance of the economy in a country,” he said.

“Therefore, owing to the country specific features, in the analysis special attention should be paid to a more thorough assessment of the gross external debt and foreign currency debt of Hungary,” he added.

Nagy noted that the gross foreign currency debt of the Hungarian economy had fallen to 56 percent of GDP by the end of the second quarter of 2018 from a peak of more than 130 percent in the first quarter of 2009. Excluding intercompany loans, the FX debt-to-GDP ratio stood at 39 percent in March, he added.

FX debt of the government and households, the sectors most exposed to FX risks, has dropped markedly, he said. In line with a government strategy to boost domestic financing, the share of FX debt within public debt fell under 20 percent by the end of 2017 from almost 40 percent at the end of 2010. And households’ FX debt was reduced to practically nil after Swiss franc-based loans, once the most popular lending product in Hungary, were converted into forints in 2014, he added.

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Although the FX debt of Hungarian companies is relatively high in terms of GDP, it is “markedly low” compared to the export revenue of these businesses which provides natural hedging, Nagy said.

FX debt of Hungarian companies was equivalent to about 40 percent of their export revenue in 2017,

the paper shows.

Most FX debt of Hungarian companies is denominated in euros, the currency in which much of their revenue is realised, Nagy added.

Nagy also suggested considering the net FX debt indicator when assessing the vulnerability of sectors of Hungary’s economy. This indicator has decreased significantly in recent years, supported by an increase in foreign currency assets of corporations and deleveraging, he added.

Source: MTI