Weekly Financial Focus - October 7th

10 Octombrie 2011

BANCA COMERCIALĂ ROMÂNĂ S.A.

• Inflation to enter NBR target range in September
• Retail sales extremely weak
• August industrial production surprisingly resilient
• BSE: Volatility rises to record on debt-crisis fears

 

News & real economy

Inflation to enter NBR target range in September

Our forecast for the September inflation rate, due next Monday, is 0% m/m and 3.7% y/y. The key driver of the disinflation process is the steep fall in the price of food products, which account for 37% of the consumer basket, after a bumper crop in agriculture. At the same time, the planned increases in administered prices were either delayed or had a weaker than initially estimated impact on inflation in 2011. The improved performance could be short-lived and annual inflation could again rise above the target in 2H12, due to an increase in excise for tobacco, alcohol and energy at the beginning of 2012 and a potential weak performance from domestic agriculture next summer. Besides these one-offs, the structural problems that lie behind the inflation rate still have to be tackled – the reform of the price setting mechanism in state-owned enterprises is only half-way done, the supply of domestic goods and services on consumer markets is significantly below the demand, while the supervision of some segments of consumer markets could be improved further. On the occasion of a financial seminar held in Bucharest, the NBR governor said that inflation will decrease to below 4% in September, but this does not necessarily mean that rates will go down, due to the persistence of some inflationary risks. We foresee a flat key rate at 6.25% in 2011-12, as next year’s elections create some fiscal risks, while the international environment is likely to remain skittish.

Retail sales extremely weak

August retail sales were very weak and confirmed once again that household consumption is being squeezed by the ambitious fiscal consolidation program and the distressing news flow from peripheral Eurozone countries. Retail sales (seasonally-adjusted data) decreased 3% m/m and 5.9% y/y, mainly due to a steep fall in the sale of food products. Fuels managed to remain in positive territory, both in monthly and annual terms. With new prudential regulations against consumer lending in the pipeline and consumer confidence falling, it is almost certain that retail sales will need several more quarters for a complete recovery.

August industrial production surprisingly resilient

In spite of a deterioration of the global environment at the end of this summer and still weak domestic demand, industrial production (seasonally-adjusted data) increased 1.9% m/m and 7.4% y/y in August. This is the fastest annual growth rate in the last six months. The capital goods industry was the key driver of the good performance of Romanian industry (+9% m/m and +18.5% y/y). New orders for manufacturing returned to double-digit annual growth rates in August, supported by the intermediate goods and capital goods industries, while confidence was almost flat in September. Although a deterioration of industrial production performance is not ruled out for the future, for the time being, we feel comfortable with our economic growth forecast of 1.4% in 2011.

MinFin sees lower yields on primary market

The deputy finance minister said that government yields will go down in the future, in line with the disinflation process. He reiterated Romania's plans to tap US capital markets with a Eurobond issue later this year. Meanwhile, yields remained on an upward trend on the primary market and the MinFin sold 6-month T-bills worth RON 298mn at 6.69%, up from 6.29% in mid-May. Their plans were consistent with a total issue of RON 300mn, while investors submitted bids worth RON 721mn. After capping yields, the MinFin finally accepted higher yields at some auctions for RON-denominated paper and this added to investors' confusion over its strategy. Our estimation for 5Y yields is 7.5% in December and 7.3% next June.

 

FX, money market and FI

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