Weekly Financial Focus
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4 Februarie 2011 |
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BANCA COMERCIALĂ ROMÂNĂ S.A. |
Adresa
Bulevardul Regina Elisabeta, Nr. 5
Bucureşti, Sector 3
Telefon
+40-21-314.91.90
+40-21-312.61.85
Fax
+40-21-310.02.46
+40-21-311.18.19
Website
www.bcr.ro
News
IMF points to price liberalisation in energy
IMF officials said prices of natural gas and electricity should be liberalized according to minister of economy, Ion Ariton. He added the ministry should come up with a new calculation base for the natural gas and electricity prices by mid-2011 since there are some problems related to the way the administered prices are currently established.
Asked about the IMF's request to liberalize the energy prices, Prime Minister Boc said on Wednesday that the price of natural gas is not under the government's authority and mentioned that ANRE (Romanian Energy Regulatory Authority), as an independent body, can conduct investigations and take actions against fraud by means of indirect controls.
Our view:
This is not good news for the inflation outlook, especially now when the second round effects (following the VAT hike to 24%) are not gone and the country is still limping its way through a prolonged recession. Inflation quickened to a 28-months high in December (7.96%) and short term prospects apart from the recent IMF recommendation, are not so bright while inflationary expectations are still high (10% in Dec-10). Romania is not even half way through its fiscal consolidation program which has already been eating away at consumer confidence, crippling the recovery of private consumption. Romania is likely to emerge from recession in the second half of this year and the very modest recovery will be well below an already reduced potential.
Further liberalization of energy prices (i.e. natural gas and electricity) should be carefully balanced against Romania returning to a reasonable medium term economic growth (at least medium term potential which stands at around 3.5%) and above all against the inflationary expectations which will certainly make investors hang back from putting money in a high inflationary environment.
The share of natural gas and electricity in total CPI basket is by far the highest in Romania compared to say Euro Zone (8.7% vs 3.9%) according to Eurostat and the impact of any percentage point hike in energy prices on inflation is more than 2 times higher in Romania than in Eurozone.
A phased process and a clear-cut and transparent agenda of energy price liberalization for Romania should be agreed upon with IMF in the next period so the process could be carried through over the next years with as little 'damage' as possible. Otherwise, Romania will continue to be perceived as a country constantly struggling to fight inflation but not in a sensible way, while the central bank will be limited in its efforts to anchor inflationary expectations and bring interest rates down further.
CB kept key rate on hold
Central Bank decided yesterday to maintain the key rate at 6.25% in line with our expectations and market consensus. Minimum reserve requirements were also kept unchanged for both RON and FX. The review of the macro indicators show the persistence of the deficit of aggregate demand, the maintenance of the C/A deficit at sustainable levels and the negative annual real dynamics of nongovernment lending, according to the press release issued by the NBR.
The current inflation forecast of the NBR reveals the prospects of a resumption of the disinflation process in early-2011. Disinflation could gain speed once the first-round effects of the hike in VAT dissipate. The risks surrounding NBR’s inflation forecast are related mainly to factors outside the central bank’s influence – adjustments of administered prices, the continuation of the fiscal consolidation process and structural reforms as well as the development of food and commodity international prices.
We maintain our forecast for end-2011 key rate at 5.75% which is supportive for government bonds. We see risks coming from an extended period of high food prices on global markets coupled with a low domestic supply in agriculture due a possible summer drought.
