Weekly Financial - September 24th

27 Septembrie 2010

BANCA COMERCIALĂ ROMÂNĂ S.A.

 

News

Central bank to keep key rate flat next Wednesday

The NBR could decide to maintain the key rate at 6.25%, while leaving unchanged the minimum reserve requirements for both RON and FX. The uncertainty related to the second-round impact of the recent hike in VAT (+5pp to 24% beginning with July 1) is one of the reasons behind our call. Inflation could gain speed in September, due to hikes in administered prices such as urban and inter-urban transport, partially related to the reduction of government subsidies. Pressures on the RON are still present, due to the skittish political situation, and investors need additional time to evaluate the concrete results of the fiscal consolidation program recently implemented by the government.

The only thing that speaks in favor of a rate cut is the depressed economic growth outlook for 2H10. However, the NBR recently indicated that debates about the resumption of economic growth are not welcome, so long as the public sector is still not fully restructured. Additional fiscal consolidation measures are not presently required, but those already agreed on with the IMF and EC should be pursued until the end. The key rate could remain flat until 1Q11 and then be cut again in small steps to support a balanced economic recovery in the aftermath of the fiscal consolidation process.

Romania to reach another agreement with IMF in 2011

This week, President Basescu delivered a speech in the Parliament and said that Romania will reach another agreement with the IMF in 2011. The most likely scenario is a precautionary stand-by arrangement, where Romania will choose not to draw upon approved amounts, but will retain the option to do so if conditions deteriorate. The Fund will not finance the budget deficit and Basescu sent strong signals regarding the necessity of additional efforts to reform the public pension system, increase the predictability of the fiscal environment and speed up the absorption of European funds. In 2011, the fiscal gap (officially estimated at EUR 5.7bn or 4.4% of GDP) will be covered through domestic and international debt offerings. According to a European official, the EC will also be party to the arrangement between Romania and the IMF. The negotiations between Romania and the Fund will begin in October, on the occasion of the next review of the current 24-month stand-by arrangement. The MinFin intends to extend its three-year program to sell euro mid-term notes in order to be able to issue debt on the US market. The total value of the program is EUR 7bn and Romania will be ready to issue debt on the global markets in mid-October. A continuation of the relationship with the IMF could pave the way for a successful issuance of euro mid-term notes on the global markets later this autumn.

EC disbursed EUR 1.2 bn to MinFin

The EC acknowledged the efforts of the Romanian authorities to implement ambitious fiscal consolidation measures in order to reduce the budget deficit below 3% of GDP in 2012. According to the press release issued by the EC, it is crucial that the implemented fiscal consolidation measures remain in force and that their effects are not offset by other policies. This could imply increased awareness of the rather unstable political environment and of the potential negative fiscal effects that could develop later this autumn. The opposition Social Democrat Party asked the Constitutional Court to rule on the constitutionality of the new pensions law that has already been approved in the Parliament. At the same time, the Social Democrats said that they will begin procedures to suspend Basescu if he signs the decree that will enable the law to come into force. The Liberals are also supporting them, while some rumors indicate that even some members of the ruling coalition favor this political strategy. According to the Constitution, if the Parliament suspends the president, a referendum will be called within the next 30 days to dismiss him. Against the backdrop of this political news, the disbursement of the third installment from the EC to the MinFin, in the context of the balance of payments loan assistance granted to Romania in May 2009, was only a minor event, which prevented a significant positive reaction on the capital markets. Today, the IMF board will very likely decide on the disbursement of another EUR 0.9bn to the NBR. For the moment, we maintain our capital market forecasts, but see risks of increased volatility over the next few weeks.

 

FX Market

 

Money market & Fixed Income

Auction schedule for government debt in September 2010

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The tricky lag LUCIAN CROITORU Adviser to the Governor - BANCA NAŢIONALĂ A ROMÂNIEI Lucian Croitoru, Adviser on monetary policy issues to the National Bank of Romania Governor, talks about the NBR’s next moves and explains why the decrease ofthe policy rate hasn’t been reflected into lower interest rates on bank loans. mai mult... The turnaround CRISTIAN SPORIS Secretar de Stat - MINISTERUL ECONOMIEI ŞI FINANŢELOR Cristian Sporis, Secretary of State at the Ministry of Public Finance, in charge with the national treasury and public debt, explains how the state managed to borrow money at the lowest costs in the last seven years and how it turned from a clear market taker into a player with a strong position on the market. mai mult...