Weekly Financial Focus - May 2-6, 2011
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9 Mai 2011 |
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BANCA COMERCIALĂ ROMÂNĂ S.A. |
Adresa
Bulevardul Regina Elisabeta, Nr. 5
Bucureşti, Sector 3
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+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 & real economy
Central bank kept key rate flat at 6.25%; inflation forecast raised to 5.1% in 2011
NBR decided to keep the key rate at 6.25%, in line with our Key rate and CPI and market expectations. At the same time, minimum reserve requirements for FX and RON liabilities remained unchanged. According to the press release the disinflation process will resume in 2H11, once the first-round effect of the VAT hike fades, but inflation will enter the targeted range only in 2012. This suggests that the new official inflation forecast for 2011 (due on Thursday at the presentation of the quarterly Inflation Report) might be above the target (3%±1pp). NBR has also mentioned the persistence of risks and uncertainties related to the calendar and magnitude of administered price adjustment.
This is in line with our scenario which points to significant inflationary pressures in the next quarters coming from potential hikes in the administered price of energy and public transport at the request of the IMF and EU. The recent appreciation of the RON is seen as triggered by an increase in volatile capital inflows which is likely to intensify in the future. This will generate some constraints on the dosage of the monetary policy tools, according to NBR. In its latest inflation report released this week, central bank raised the inflation forecast both for 2011 and 2012 to 5.1% and 3.6% respectively (from 3.6% and 3.2% in the previous report) and specified that higher forecasts for oil prices and uncertainties over further fiscal consolidation were the underlying reasons for that. Also, the central bank showed that excessive appreciation of leu was not sustainable and would be of benefit to inflation only on short term, adding that it would not encourage high volatility. Also, NBR explained that that the recent firming of the national currency tightened the monetary policy.
We see inflation hovering above the upper limited of the central bank CPI targeted range in 2012 and only some cumulated positive factors could bring it down within the 3%±1pp band. High uncertainties and the upside risks to inflation already highlighted by central bank as well as a likely fiscal slippage ahead of 2012 elections leave little room for further monetary easing. We see the key rate at 6.25% in December 2011 and 6.75% in June 2012.
Retail sales and construction reduced their fall y/y in March
This was not too much of a surprise, but more of a seasonal factor, as March is usually a month when retail sales perk up on m/m terms. As we have constantly said, retail sales will find it difficult to shift to positive territory y/y, weighed down by persistently high inflation. Although consumer sentiment shows signs of improvement, no one knows for sure if consumer behavior has not changed to the cautious side compared to pre-crisis times. After the significant wage cuts in the public sector last year as part of the austerity program, consumers could still be fazed, even though the government raised the base salary in the public sector by up to 15% as of January 2011. Retail sales advanced 18% m/m in March, with all three segments – food, non-food and fuels – displaying high numbers. However, in y/y terms, retail sales were down 5.5% in the first three months. Local managers expect a moderate increase in retail sales over April-June and a further increase in prices.
As mentioned in our previous comments, local managers seem increasingly more in touch with the reality as far as the trends in construction are concerned. The high reading in March (+30% m/m) came to confirm that, while all three segments – residential, non-residential and engineering – posted significant growth rates m/m. But, since for every hill there’s a valley, on seasonally adjusted terms, things were a little bit different and construction was down 1.8% m/m. Still in negative territory, construction is gradually approaching ‘zero growth’, but positive numbers will be more likely in the second half of the year. In the first three months, construction continued to reduce slightly their fall (-4.4% from -6.2% in the first two months) and managers seem pretty optimistic for the April-June when they expect this sector to see further improvement. If the government follows through on their promises regarding several big infrastructure projects, construction could gain momentum this year, but the results will probably become more visible in 2012.
Reforms likely to come under threat as 2012 elections approach, local sources quoting IMF
The elections scheduled to take place next year pose a great danger to the reforms Romania has committed to implement as, according to some sources citing IMF representatives, the government might ease off on some of them once the economy recovers. An IMF mission is currently in Bucharest to perform the first macro review within the recently closed IMF/EU precautionary arrangement worth EUR 5bn. The IMF has asked Romanian authorities to speed up the decision-making process aimed at restructuring state-owned companies, regardless of whether this means their privatization or closing down. 18 companies are the subject of the current talks between the IMF and government officials.
It seems that the announced reduction in social contributions planned for the second half of this year has also been brought into question by the IMF delegation and the local media has quoted Fund representatives as saying that this should be carried out if there are guarantees that the targets set for 2011 and 2012 can be met – the budget deficit should be slashed to below 3% of GDP in 2012 (cash terms). The Fiscal and Budget Strategy 2012-2014 (draft) stipulates the reduction of social contributions by around 2 percentage points in the second half of 2011. The government sees the relaxation of social contributions as a way of reducing tax evasion on the labor market. Employers currently pay social contributions ranging from 20.8% up to 30.8%, depending on working conditions. The IMF team will stay in Bucharest until May 9.
EUR denominated local T-bonds issue oversubscribed by investors
The MinFin sold 3-year EUR-denominated bonds on the local market worth EUR 936mn, well above its initial issuance plan of EUR 600mn. The average yield stood at 4.89%. Demand was strong, in the context of the recent cut in FX minimum reserve requirements, which released around EUR 1bn into the market. Investors submitted total bids worth EUR 1.25bn. Before this auction, the deputy finance minister said that the MinFin is comfortable with repaying the debt maturing in July of EUR 2.5bn.
