Weekly Financial Focus - October 28th

28 Octombrie 2011

BANCA COMERCIALĂ ROMÂNĂ S.A.

• Killing off FX loans would wipe out mortgages
• loans, central bank chief
• NBR to keep key rate on hold
• Fiscal consolidation efforts to continue in 2012
• BSE: Stocks rise on EU Summit hopes

 

News and real economy

Killing off FX loans would wipe out mortgage loans, central bank chief

Central bank governor yesterday said that it would be a big mistake if all FX loans were stopped while a move like this would certainly put an end to mortgage loans. He acknowledged that FX lending involves some risks, but the 'mix' is also very important. Central bank issued recently a regulation which aims to put a squeeze on FX consumer loans. Under the new framework, the maturity of the consumer loans will be no longer than five years, while the collateral will cover 133% of the borrowed amount.

Although concerns worldwide may dissipate for a while in the wake of Greece's rescue and market sentiment is likely to recover somewhat, we maintain our economic growth scenario for Romania, which shows that real GDP will trail below long-term potential in 2012-13, due to a fragile recovery in household consumption. Although Romania is in a more comfortable position than Greece in almost every aspect, it is worth noticing that fiscal consolidation here is only part-way through and elections are just around the corner. Romania will have to walk a thin line in the coming months and years to demonstrate that it has learned its lesson and is ready to generate economic growth in a more sustainable way.

For now, it seems that the European crisis has avoided catastrophe, and everybody welcomed the massive debt reduction in Greece's debt and the EUR 130bn in fresh funding coming from EU/IMF under the Brussels agreement. The country vowed to push ahead with the long-delayed reforms, but it remains to be seen how reforms in Greece will actually come along in the complete absence of public support, which already harbors fears about the country losing its sovereignty.

NBR to keep key rate on hold

Last week, NBR Deputy Governor Popa said that a country whose C/A deficit was substantial before the global financial crisis and is still hovering around 4% of GDP needs to stimulate domestic savings and this requires appropriate levels of interest rates on deposits. Popa added that the NBR will not rush to cut rates, even though it expects inflation to ease further in the coming months from an all-time low of 3.5% y/y reached in September. The balance of risks associated with inflation is still on the upside and is coming mainly from the external sector.

These statements reinforce our view that the NBR will keep the key rate on hold at 6.25% next Wednesday, due to uncertainties regarding the long-term resolution of the Eurozone sovereign debt crisis. The NBR governor, President Basescu and top officials from the MinFin recently advocated the need for another Vienna-like initiative that should ensure the maintenance of the exposure to Romania of the largest foreign banks. According to BIS data, banks from Austria, Greece, France, Italy and Netherlands are the top external creditors of Romania. According to our scenario, 5Y government yields should remain around the present levels at the end of 2011 before falling to 7.3% in June 2012.

Fiscal consolidation efforts to continue in 2012

A leader of the ruling Democrat Liberal Party said that the government is considering a freeze of public wages and pensions in 1H12 in its negotiations with the IMF and EU for the 2012 state budget. The officially estimated economic growth is 2%. Potential hikes in public wages and pensions in 2H12 are conditional upon a good performance of the Romanian economy. President Basescu said that Romania should cut its budget deficit to below 3% of GDP in 2012, in order to avoid excessive borrowing during these turbulent times and to create the conditions for a gradual reduction of the public debt (currently at 31% of GDP) in the years ahead.

The new legislation in the area of public wages, which enables the replacement of only one in seven departing workers, led to a natural decrease in the number of public servants of at least 5,000 people each month. In 2012, the focus will shift to the cut in the number of employees in loss-making state-owned enterprises. According to President Basescu, major categories of taxes will remain unchanged in 2012, as the government is trying to increase the predictability of the business environment. In our view, the parliamentary elections scheduled for November 2012 create some incentives for populist fiscal measures, but these are likely to be mitigated by a provision of the fiscal responsibility law, which does not allow an increase in public wages in the last six months of the mandate of the central or local governments. In our view, a budget deficit of 4.2% of GDP and a clear determination of the government to continue the reforms of the public sector in an election year should ensure Romania easy access to international capital markets in 2012.

 

FX, money market and FI

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The tricky lag LUCIAN CROITORU Adviser to the Governor - BANCA NAŢIONALĂ A ROMÂNIEI Lucian Croitoru, Adviser on monetary policy issues to the National Bank of Romania Governor, talks about the NBR’s next moves and explains why the decrease ofthe policy rate hasn’t been reflected into lower interest rates on bank loans. mai mult... The turnaround CRISTIAN SPORIS Secretar de Stat - MINISTERUL ECONOMIEI ŞI FINANŢELOR Cristian Sporis, Secretary of State at the Ministry of Public Finance, in charge with the national treasury and public debt, explains how the state managed to borrow money at the lowest costs in the last seven years and how it turned from a clear market taker into a player with a strong position on the market. mai mult...