CEE Quarterly
 |
1 Aprilie 2011 |
 |
UNICREDIT TIRIAC BANK S.A. |
Adresa
Strada Gheţarilor, Nr. 23-25
014106 Bucureşti, Sector 1
Telefon
+40-21-200.20.00
Fax
+40-21-200.20.02
Website
www.unicredittiriac.ro
Romania (Baa3 stable/BB+ stable/BB+ stable)*
Outlook – We expect the Romanian economy to return to positive growth in 2011 (1.7% yoy) which together with extended cooperation with the IMF/EU should ensure stable external and internal financing conditions. On the back of higher CPI and likely accelerating GDP the NBR is unlikely to cut rates in the current cycle but could tolerate some further currency appreciation.
Strategy – We believe Romania could be one of the few countries globally which see rating upgrades during 2011 and hence we remain sellers of 5Y CDS. In the local bond market the light non-resident positioning coupled with appreciating currency means we see scope for lower yields on 3Y-5Y paper. Given weak domestic demand and the relatively solid external financing backdrop we believe the NBR would tolerate a gradual FX appreciation and recommend being short EUR/RON.
*Long-term foreign currency credit rating provided by Moody's, S&P and Fitch respectively
Back to positive growth finally
We keep our call of 1.7% growth – depressed local demand counterbalanced by sustainable external demand
Romania will restart growing in 2011: We expect growth to return to the Romanian economy in 2011 and forecast 1.7% yoy growth after a 1.3% yoy contraction in 2010. On a quarterly basis the 4Q10 GDP showed a modest 0.1% qoq increase following a 0.7% qoq contraction. Private consumption however remained weak contracting 0.8% qoq following a 1% qoq contraction in the previous quarter. Much of the actual improvement is driven by inventory changes which added around 4pct to the annual GDP growth in 2010. Assuming inventories reach the pre-crisis level in the first half of 2011 we do not see much of a contribution to annual GDP growth. On the other hand we see exports remaining on a solid path (up by 5.8% qoq in 4Q) while domestic demand should also show some acceleration in 2H which together with solid export performance should push the annual GDP growth to around 1.7% yoy. Looking beyond 2011 we expect GDP growth to accelerate to around 3.4% yoy.
External financing is manageable with the new IMF agreement providing additional buffer
External financing balance looks firm despite relatively wide C/A. We see the 2010 current account gap (4.2%/GDP) to widen by around 1pct as domestic demand is accelerating but we see FDI coverage as relatively good compared to other CEE countries. In 2010 FDI covered about 50% of the current account which we expect to increase to around 60%. In terms of external funding needs (about EUR 33bn in 2011) we see the coverage being sufficient without further external assistance. Assuming unchanged public and banking sector roll-over ratios in 2011 (at 106% and 100%) we believe corporate roll-over ratios could remain below 100% (as was the case in 2010) while in the case of an abrupt deterioration in market conditions the new EUR 5bn (4%/GDP) precautionary stand by agreement with the IMF/EU would serve as a sufficient buffer.
While it also limits the potential fiscal overshoot
Moreover the ongoing presence of the IMF/EU should limit the potential deterioration of the fiscal accounts in the run up to the next general elections in 2012. Plus the positive results of the international presence was already evident while accelerating growth should help to achieve the fiscal gap narrowing to 5%/GDP in 2011 from 6.5%/GDP in 2010. In addition the debt dynamics should stabilize at around 35-38%/GDP which looks extremely low in international comparison.
Higher inflation means we no longer see the NBR cutting rates in 2H11
Higher inflation means we expect NBR to keep rates on hold until the end of 2011: We adjust upward our expectation for 2011 inflation to 4.7% yoy eop, above the CB target band of 3% +/-1%. The one-off jump due to the VAT increase (+5pps) as of July 2010 is expected to disappear from the yearly inflation pushing the headline number way below the current level. Nevertheless, increasing food and oil prices in the international markets will probably not allow the CPI to reach the NBR target. In line with the logic in the inflation targeting system we change our expectation of the monetary policy rate to be kept at the current level of 6.25% until the year-end. Moreover, given the changing inflationary outlook, the probability for an upward movement in interest rates cannot be ruled out particularly given a more hawkish external backdrop (ECB).
We are constructive on Romanian markets
Market outlook is constructive on all asset classes with potential rating upgrades serving as a key trigger: Against the above backdrop we believe Romania could be one of the few countries globally which sees rating upgrades during 2011 and we expect the rating moving back to investment grade potentially in the second half of the year. This in turn will likely support further compression of credit spreads and we remain sellers of 5Y CDS. In the local bond market although the interest rate dynamics from the NBR might not be as supportive as it was previously hoped, we believe the light non-resident positioning coupled with the appreciating currency means there is scope for lower yields on the 3Y-5Y segment of the curve. Given weak domestic demand and relatively solid external financing backdrop we believe the NBR would tolerate a gradual FX appreciation which would tighten monetary conditions and hence would remain short EUR/RON.
