MNB balance sheet suggests the forint has only limited potential upside left against the euro

HUNGARY - In Brief 14 Jun 2021 by Istvan Racz

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The end-May balance sheet of the MNB was released today. We made a simple calculation to find out how much room is left for further potential forint strengthening against the euro. The result is that at EURHUF 350, the forint is almost as strong as the maximum level it can potentially reach. This is the same result as the one that can be derived from the analysis of export and import prices, the fundamental approach that has to do with the competitiveness of the domestic economy.Our starting point is that the government is most probably not in the position or in the mood to recapitalise the MNB any time soon. Indeed, the MNB paid HUF 250bn of annual dividend to the government both last year end this year. So whatever capital base the MNB has, it needs to be sufficient to keep it solvent, as an orderly bank is supposed to be, even with a government as its sole shareholder.But as it happened, the MNB's capital base fell sharply early this year, to HUF 427bn by end-May from HUF 1142bn at the end of last year. Of the total HUF 715bn decrease over five months, HUF 427bn was due to valuations, including the impact of the forint's appreciation on the forint value of net foreign assets, and also the revaluation of other assets and liabilities, mainly bonds, of course. This and the dividend paid to the government made a total of HUF 677bn, which makes the impression that the MNB may have recorded some operational loss as well in January-May (but that we do not know for sure).The point is that any further unit of forint appreciation against the euro (and other foreign currencies if cross rates do not change) should reduce the capital base by about HUF 26bn. As a result, should t...