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Hungary’s external vulnerability continued to decline

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Hungary’s external vulnerability continued to decline in 2016 Q3. The high net lending allowed for a further decrease in the country’s external debt ratios, while short-term external debt also declined significantly. The current account surplus exceeded 4 per cent of GDP, and the economy’s net lending was close to 8 per cent of GDP, thus still considerably exceeding the value observed in the neighbouring countries.

Budapest, 3 January 2017 – The Magyar Nemzeti Bank’s Report on the Balance of Payments aims to regularly provide market participants with comprehensive analyses of trends in Hungary’s external balance.

According to the real economy approach, both net lending and the current account surplus increased slightly, with contributions from all the three factors. The historically high trade surplus was attributable to an expansion in the goods balance, resulting from an improvement in the terms of trade. The transfer balance expanded slightly compared to the previous quarter, owing to the transfer payments related to the new EU budget cycle. Mainly as a result of declining interest payments, the deficit on the income balance has been following a decreasing trend in the recent quarters.

According to the financing side developments, in parallel with significant net FDI inflows of EUR 1.5 billion, the decline in net external debt resulting from transactions, which was mainly related to the banking sector, exceeded EUR 3 billion in the third quarter. The decline in the net external debt of the banking sector is still attributable to the FX liquidity from the closing of the FX swap transactions related to the conversion into forints, but the decrease in the sector’s external – mainly short-term – debt also contributed to this trend. The net external debt of the consolidated general government increased slightly in Q3, owing primarily to the decline in FX reserves as a result of the conversion into forints, while the gross external debt of the government fell considerably, in parallel with households’ ongoing significant purchases of government securities.

The adjustment of debt indicators continued in 2016 Q3 as well. Net external debt fell to nearly 20 per cent of GDP, while the gross external debt-to-GDP ratio declined to below 70 per cent. In line with the developments in financing, the decline in net external debt is mostly attributable to the banking sector and to a smaller degree to the corporate sector, while the net external debt of the consolidated general government actually increased slightly as a result of revaluation effects and non-residents’ government securities purchases following the rating upgrade. The decline in the country’s gross external debt can mainly be ascribed to the strengthening of the forint against the main currencies and the renewal of a maturing FX bond from domestic sources. In parallel with the gross external debt, short-term external debt – which is important in terms of external vulnerability – continued to fall, to EUR 18.4 billion. Considering that short-term external debt declined to a greater extent than the decrease in FX reserves, the level of FX reserves of EUR 23.7 billion is still well above the level expected by investors.