Weekly financial focus
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26 August 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
BCR: Economic outlook revised down for 2012
The sense of foreboding that took hold of the markets lately and the unrelenting fear of crisis spreading across Europe has made investors extremely wary about what comes next. Since this situation is expected to last quite a while and bouts of high emotionality will continue in the future, we have decided to revise downwards the economic outlook of the country for 2012. The risk of contagion is pretty high and adverse effects could feed through to the Romanian economy by means of two main transmission channels: demand for exports and capital flows. Those two are of particular importance for Romania, which has so far witnessed a fragile economic recovery that relied heavily on exports and the build-up of inventories. More telling, 70% of the Romanian exports are towards EU, while Germany and Italy are the two main foreign trade partners, accounting for around 30% of total exports. Industry has already showed signs of weakness amid receding foreign demand and the trend may extend into 2012, with direct impact on the inventory business cycle. Also, investors have been so far reluctant to pour money into the ailing economy and FDIs have remained in the doldrums (-17% y/y in 1H11) already signaling that capital investments will not be as supportive as we originally expected, although our approach was far from being optimistic.
Under these less auspicious circumstances – external and internal – we have adjusted downwards our baseline scenario for 2012, and see the economy advancing 2.9%, from a previous 3.9%. We also see a slower recovery of private consumption, although 2012 may hint at some ‘fiscal slippage’, which is commonplace in election years. The current IMF/EU arrangement could after all be a guarantee that the cabinet will not be overstepping reasonable limits even in an election year and that Romania will make further strides towards meeting the ambitious budget deficit target of 3% of GDP in 2012. The inflation outlook remains dominated by pretty high uncertainties, starting with the further liberalization of administered prices - for which a clear-cut agenda has yet to be released by the government - continuing with the quality of the agricultural year and last, but not least, the developments of the international price of commodities. In a global slowing growth scenario, the latter should exert less pressure on inflation. We have reduced slightly the inflation forecast to 3.9% for end-2012 from 4.2% in the previous scenario and see the central bank keeping the key interest rate flat in 2012. Since the risk aversion will continue to harass the markets every so often, we have turned more cautious and see the EURRON at 4.28 as of end-2011 and 4.2 in December 2012. On the secondary market, we now see 5-year yields at 7.5% in Dec-11 and at 7.3% in 2012.
MinFin stands firm over jumping yields
After overplaying their hands on Monday, when the MinFin rejected all bids at a T-bill auction, investors seemed to have come round a little on Thursday, when the ministry sold RON 226.5mn in 10-year T-bonds at an average yield of 7.59%. This was only a partial success on the MinFin side, as it sold slightly more than half the amount planned (RON 400mn). This begins to remind us of the second half of 2010, when the MinFin constantly capped the yields or sold less than planned in several auctions, frowning at the too expensive bids submitted by investors. This time, however, things are a little different, since the disbursements under the current IMF/EU precautionary agreement can be extended only in exceptional circumstances. If investors stand their ground in terms of price for the remainder of this year, we cannot rule out the central bank lending the MinFin a hand and lowering the RON mandatory reserves this year in an attempt to keep yields at more reasonable levels, closer to those on the secondary market. However, this move should carefully be thought through, considering the skittish behavior of investors, a factor which could bring the leu under more pressure. Leu volatility decreased this week while the leu traded between 4.2395-4.2700.
