Record Foreign Exchange Reserves Bolster Forint Stability Amid Geopolitical Risks

Mihály Varga, President of the Hungarian National Bank

While the forint has been reaching new highs for months, Hungary’s foreign exchange reserves have risen to a historic record of €56.8 billion. Analysts believe that the high level of reserves signals to investors that Hungary’s risk assessment is more favorable, so that despite geopolitical tensions, no sharp exchange rate fluctuations are to be expected, as reported by Világgazdaság.

“Regardless of which indicator we look at, the reserves are more than sufficient to cope with any potential risks,” said Zsolt Kuti, the Hungarian National Bank’s executive director responsible for managing foreign exchange reserves, in an MNB podcast on Sunday evening. Last week, the national bank announced

that the central bank’s foreign exchange reserves had risen to a historic high of €56.8 billion after increasing by €6.6 billion within a month.

Péter Virovácz, senior analyst at ING Bank, described the increase in reserves as part of a deliberate strategy by the MNB, which can do no harm in the current climate of geopolitical risk. According to the analyst, the level of foreign exchange reserves also contributes to the stability of the forint, as it gives investors the feeling that the risk is lower and that no major fluctuations are to be expected on the foreign exchange market.

The article points out that there have been numerous tensions around the world recently that make the currencies of emerging economies, including Hungary, vulnerable, such as the war in Ukraine or smaller regional conflicts such as the events in Iran and Venezuela.

The importance of foreign exchange reserves comes to the fore especially in crisis situations, when declining liquidity makes it difficult to obtain external financing. But even in calm market conditions, investors expect central banks to have sufficient foreign exchange reserves.

Ultimately, a high level of reserves reduces a country’s vulnerability, and it cannot be ruled out that this has also contributed to the strengthening of the forint,”

according to Világgzdaság, which previously reported that the Hungarian currency crossed another important threshold against the euro on Monday afternoon, with one euro costing less than 377 forints. The forint has not been this strong against the euro for two years, and it is also approaching its four-year high reached at the end of January against the dollar, with one dollar costing only 316.6 forints on Monday afternoon.

The strengthening of the forint may also have been supported by the deficit figures for January published on Monday, as

public finances ended the first month of the year with a surplus,

as announced by the Ministry for National Economy in a statement.

The domestic currency also gained against regional currencies such as the Polish złoty and the Czech koruna. Against the former, the Hungarian currency reached a two-year high, and against the latter, it reached an almost one-and-a-half-year high.

The portal believes that this suggests that the rise of the forint is not only due to the weakness of the dollar, which generally benefits the currencies of emerging markets, but also to factors specific to the Hungarian economy. The upward trend of the forint against the euro has continued for about a year, despite minor fluctuations, and it is conceivable that this trend will continue in the coming months, which could also lead to a slowdown in inflation.

Via Világgazdaság; Featured photo: MTI/Bodnár Boglárka

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