Budapest, 10 May 2016. The Magyar Nemzeti Bank’s (MNB) Self-Financing Programme, announced in the spring of 2014, has significantly reduced Hungary’s external vulnerability and has contributed to the achievement of its price stability objective through a reduction in longer-term yields. The Bank’s interest rate swap (IRS), channelling banks’ funds, has had a major role in the success of the Programme. With the phasing-out of the two-week deposit facility in April 2016, banks’ adjustment has largely ended and with the reduction in the Government’s foreign currency debt, the value added of the instrument, the amount outstanding of which is more than HUF 1,500 billion, has been declining. After thorough consideration of the costs and benefits related to the maintenance of the instrument, the MNB has decided that it will withdraw the instrument from its operations and will hold its last self-financing IRS tender on 7 July 2016. Banks’ obligation to hold government securities will remain valid until maturity of the swaps.
As part of its Self-Financing Programme, the MNB has reformed its monetary policy instruments in their entirety from the spring of 2014, in order to reduce external vulnerability and contribute to an easing in monetary conditions using unconventional instruments. The introduction of the interest rate swap (IRS) facility in June 2014 was prominent among the changes affecting the bank’s instruments. With the introduction of the IRS, enabling banks to manage their interest rate risks, the MNB supported the banking sector’s adjustment to the reform of its monetary policy instruments by increasing their holdings of eligible securities, i.e. mainly by purchasing government securities, due to the characteristics of the Hungarian securities markets.
The Self-Financing Programme, and particularly the interest rate swap facility becoming its iconic element, has achieved the objectives set. In the last two years, the banking sector’s government securities holdings have increased by some HUF 2,700 billion and Hungarian banks have become the main creditors instead of foreign investors in the forint government securities market, which has resulted in a more stable debt financing. It is also partly due to the Self-Financing Programme that the Hungarian state was able to refinance a foreign currency debt worth more than EUR 8 billion between 2014 and 2016, and its foreign currency debt to total debt ratio dropped from a peak level of 50 per cent to below 30 per cent. Hungarian yields sank to the Polish levels at long maturities as well, which contributed to an easing in monetary conditions. The Self-Financing Programme narrowed the MNB’s balance sheet, which resulted in a saving of HUF 30 billion for the MNB between April 2014 and May 2016 and, looking ahead, it will also decrease the MNB’s interest expenditures by tens of billions of forints per year and will lead to a reduction in the Bank’s interest rate risk.
Together with the above results, the Self-Financing Programme has reached a turning point. The phasing-out of the two-week deposit facility became effective in April 2016, and the major reforms to the operational framework have come to an end and the adjustment by banks has almost run its course. Looking ahead, the Debt Manager’s debt structure became healthier, owing in part to the Self-Financing Programme. Consequently, maturing foreign currency debt will be far smaller in the following years than in the period between 2014 and 2016 and pressure on the forint government securities market is likely to abate. The share of foreign currency in government debt can approach its historical minimum level at the end of 2016, which does not make it necessary either to continue the dynamic reduction in the foreign currency ratio.
Consistent with the above, structural demand for IRSs has been falling since February 2016. In view of this, the MNB has decided that, after a silent exit period starting in February 2016, which was discernible in the conditions of tenders and pricing, it will terminate IRS tenders. The last IRS tender will be held on 7 July 2016. As nearly all foreign currency maturities are concentrated in the first half of this year, by gradually phasing out the facility the MNB supports the safe financing of government debt and ensures that the termination of the facility will have a limited impact on the market. Banks’ obligation to hold government securities will remain valid until the transactions mature.