Central bank spokesman says strengthening of Swiss franc represents growth risk

The recent strengthening of the Swiss franc entails a growth risk for Hungary, and the forint’s weakening raises the country’s inflation risk and contributes to a rise in the percentage of non-performing loans in bank portfolios, National Bank of Hungary Spokesman Andras Simon told MTI on Wednesday.

Mr Simon said that the Swiss franc’s strengthening will prompt Hungarians with loans denominated in the currency to reduce their consumption and investments, while the weakening of the forint causes lending losses in the foreign-currency-denominated portfolio of banks, thus reducing their capital adequacy and their lending activity.

Mr Simon added that declining investment and consumer demand as well as a reduction in lending inhibits economic growth, which in Hungary’s case could represent a more powerful factor than the growth-stimulating effects of weaker forint rates.

The central bank spokesman said that the NBH emphasised in its April stability report the risks resulting from the deterioration in the banks’ portfolios, while also noting that the ratio of the non-performing portfolio could peak before the end of this year. The exchange rate weakening seen since then, however, does not only put off this turning point, but causes larger-than-expected lending losses in the financial system, which significantly cuts the banks’ capital adequacy.

The stress curve discussed in the stability report has materialised because of the weakening exchange rate, therefore it is possible that some banks will need capital raises because of their falling capital adequacy. Nevertheless it is important to emphasise that, with a strong shareholders’ background and commitment, an additional capital requirement of manageable extent can be guaranteed. The Hungarian-owned banks’ capital adequacy, and therefore their resilience, is currently high. However, the banks’ liquidity position is steadily improving and therefore the forint depreciation does not create financing problems for the banks.

Mr Simon says a further weakening of the forint – from the level known at the time when the August inflation was prepared – could jeopardise the achievement of the 3pc medium-term inflation target. As the Monetary Council said in its latest statement, if the inflationary risks persist or if there is a sustained deterioration in the country’s risk assessment, it could become necessary to raise the base rate. The NBH’s August inflation report highlighted the upside inflationary risks, which can primarily be attributed to the sustained weak exchange rate.