The monetary processes of 1999 were a lot more balance than before. As the inflation rate slowed down, the central bank cut base rates repeatedly without even once raising them. By the end of the year, the January 16 percent 14-day deposit rate has gone down in five steps to 14.25 percent. Monetary policy, however, remained strict.
The exchange rate was devalued 6.5 percent relative to the basket in 1999 (following 10.5 percent in 1998), resulting in an approximately 3 percent real appreciation, corresponding to earlier planned figures. The nominal exchange rate was again mostly close to the upper end of the intervention band, meaning that the Forint’s position was successfully strengthened after the Russian crisis.
Government security rates more or less followed the cuts of the base rate, however on an annual level they fell more than the rates of the central bank: at the beginning of the year the 3-month discount treasury bill had a 15.8 percent yield which by December fell to 12.9 percent. With some delay, business credit and deposit rates followed suit. Public deposit and credit rates also went down, yet here the interest margin is still an extremely high, approximately 11 percent.
Economic growth speeded up by the third quarter with improving balances. At the same time inflation went somewhat up. Thus a strict monetary policy was still necessary.
Prompted by favorable macroeconomic and inflation figures, the central bank executed strong interest rates cuts at the beginning of 2000. One of its aims was to keep short-term, interest rate-sensitive capital influx down and thus ease the pressure on the Forint’s exchange rate. The other was to lower still high bank credit rates.
Financial intermediary institutions (banks, insurance companies, investment funds, private pension funds) still have a much less important role in Hungary than in developed countries. The main role is played by the banking system, the balance sheet total of which amounts to 90 percent of all financial mediation – a clear sign of the underdeveloped state of other forms.
Net interest earnings hardly covered the increasing operating costs of the banking system. The real value of capitalization did not improve, and the capital adequacy ratio went down. This latter figure – for the entire sector – is far above the legal minimum and is estimated at 12 percent. At certain banks the lack of capital was made up by capital increases carried out by the owners during the year.
Because of low interest margins, the income of banks did not increase in proportion to expenditures. All this shows that in the long term – in spite of opportunities for development – the current banking structure cannot be maintained. Apart from the factors mentioned above, economy of scale on the one hand, and the slow turnover speed of retail banking investments on the other will necessitate further mergers and restructuring in the future. The question of risk management is an especially pressing one. Until recently the Hungarian banking sector realized a not insignificant portion of its earnings from state financing. The lower yields of government securities thus poses a serious challenge to financial institutions.
Banks have maintained and lately even strengthened their leading role in the external financing of the corporate sphere. In the longer term they have to take into account the competition posed by capital market financing which offers more flexible, custom-tailored and, above a certain amount, cheaper financing for corporate clients. Cutting down the cost of financial mediation is a question of life or death for the banking sector.
As for the number of banks the domestic economy is overdeveloped. However, considering the number of branch offices – especially in certain regions and settlement types – it is rather underdeveloped. The number of people employed by the sector kept growing until 1994, but has been receding since then – a tendency that due to technological development and international trends will continue this year as well.
