Yesterday, the Hungarian Central Bank (the NBH) announced the awaited launch of Funding for Growth scheme (FGS). The measures are designed to boost lending to SMEs and support the closure of FX loans. Importantly for markets, the package is less aggressive than many had feared so the initial reaction of the forint was positive - the EUR/HUF dropped after the NBH press conference and we think the pair might test the 300 level in upcoming sessions.
First, the Hungarian banking sector should receive up to 500bn forints (2% of GDP) at 0% and can lend on the money to SMEs at 2%. Recall that the current spread on SME debt is significantly higher. The banks can use half of that sum (HUF 250bn) for new lending and the second half for the closure of SME FX debt (total stock is currently around 6 billion euros). Interestingly, the FX conversion will be carried out at market rates. This is quite important, because many market players were afraid that a preferential non-market rate could have been used (similarly to the program for households). So, now it is expected that this measure will have only mild impact on the foreign exchange reserves. According to the NBH its FX reserves might fall by around EUR 3bn (from total of EUR 33.6bn).
Secondly, the other important element of the Scheme from the market point of view is the NBH decision to cut the amount of issued 2-week bills by around HUF 900bn. The central bank clearly believes that this liquidity surplus should go back the economy (though the domestic banking system), but the first beneficiary of such a reduction will be the front end of the (treasury) yield curve.