Weekly Financial Focus

8 Ianuarie 2011

BANCA COMERCIALĂ ROMÂNĂ S.A.

 

News & real economy

Key rate flat at 6.25%

Central bank, this week, decided to keep the key rate at 6.25% in line with our and market expectations. Minimum reserve requirements remained also unchanged for both RON and FX. The press release stresses the risks related to the second round effects of the hike in VAT heightened by public debates on seasonal increases in food prices. Following the concern about the tense social climate which was also mentioned in the previous press release issued by the Board in November, the central bank decided to maintain a prudent monetary policy stance. On the other hand, the central bank acknowledges that non-government loans are still in negative territory in real terms, despite further improvement in liquidity. NBR remains confident that annual inflation rate will decline to 3.4% in December 2011 from around 8% at the end of 2010 as the first round effects of the VAT hike ease. In our opinion, NBR could resume the monetary policy easing cycle through further cuts in the key rate and minimum reserve requirements, if inflationary pressures subside and Romania reaches another agreement with the IMF in March. This should support a downtrend of 5-year government yields to 6.6% in September.

Budget deficit within target in 2010

Sources cited in the local media showed the deficit of the consolidated state budget (cash terms) stood at 6.6% of GDP in 2010, below the target agreed with the IMF of 6.8%. Along with the adoption of the 2011 state budget with a deficit of 4.4% of GDP and the passage of the reforms of the public wages and pensions, this is good news for the relation between Romania and IMF. The IMF Board will meet on January 7 and will very likely decide on the disbursement of EUR 900mn to the NBR. Soon after that, the Ministry of Finance could receive EUR 360mn from the World Bank for a continuation of the public sector reforms. According to media information, Romania will reach a precautionary one year stand-by arrangement with the IMF at the end of the present one in May. The alternative, a flexible credit line, is not an appropriate solution for Romania because of its rather weak economic fundamentals, an IMF official has recently said.

The fiscal consolidation efforts are set to continue in 2011, but no other major tax increases or spending cuts are planned so far. After a 25% cut in July, the base salary will be raised by 15% in January in line with additional layoffs in the government sector. According to the prime minister, the number of public employees had already declined to 1.27mn in November, below the limit agreed with the IMF of 1.29mn persons in 2010. The pensioners will pay social security contributions of 5.5% for the public health system, irrespective of the level of their pension. At the same time, the government is decided to strengthen fight against tax evasion and in this context the undeclared incomes of unknown nature will be subject to a 16% flat income tax. The authorities will control the wealth of top 200-300 richest persons who have never received salaries or dividends but succeeded to live a prosperous life. It remains to be seen whether the government will manage to improve significantly the collection of taxes to the state budget or will score only on the popularity field with such a measure.

Government yields fell on the primary market

This week the MoF sold 1-year T-bills worth RON 1bn at 6.91%, down from 6.96% in December. The demand was strong and banks submitted total bids worth RON 2.4bn as the market is awash with liquidity and private lending is not showing yet clear signs of sustainable revival. At the same time, the flow of domestic news from the IMF side is supportive for the financial markets. In another auction the MoF sold 3-year bonds worth RON 1.08bn, more than double the planned amount, at 7.12%. After solving the issues concerning the legal advisory services the MoF will be ready to tap global markets with an EMTNs issue in 1Q11. Leu also started the year on a stronger foot and strengthened to 4.25. We maintain our view regarding a gradual appreciation of leu to 4.1 against the European single currency in December.

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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...