Weekly Financial Focus - November 11
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11 Noiembrie 2011 |
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BANCA COMERCIALĂ ROMÂNĂ S.A. |
Adresa
Bulevardul Regina Elisabeta, Nr. 5
Bucureşti, Sector 3
Telefon
+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 cuts inflation forecast to 3.3% in 2011 and 3% in 2012
The recent cut in the key rate will see only a gradual feed-through to local interest rates on loans said the governor on Monday, upon the release of the quarterly inflation report. He added that he would not expect any immediate move from commercial banks in this respect. Things should shake down first and the balance between assets and liabilities should be restored, said Mugur Isarescu. The transmission mechanism between the key rate and commercial interest rates does exist, but sometimes the link is rather weak.
The central bank lowered the key rate last week and expressed confidence that the disinflation process would continue into 2012 and that inflation no longer stands in the way of further key rate cuts if the national bank deem them necessary. In view of this, the central bank cut the inflation rate forecast to 3.3% for end-2011 (from the previous 4.6%) and to 3% for end-2012, from 3.5%. In the short run, significant upside risks to the current baseline scenario come from higher EURRON volatilities and overall developments in a Eurozone economy rocked by the sovereign debt crisis. Medium-term risks may arise from the staged liberalization of energy prices by 2015, a step for which the IMF has constantly been urging.
We see the inflation rate hovering around 3%±1pp in the first nine months of 2012, but, starting in 4Q12, the chances of CPI poking through the upper limit of the targeted range increase pretty significantly, as a less favorable base effect kicks in (the less auspicious the agricultural year, the stronger the base effect). In addition, even though the inflation expectations will calm down over the next months, they usually remain more elevated compared with the actual inflation rate, not to mention the local media predilection for keeping the subject of inflation on the boil. On the other hand, the persistence of a negative output gap in 2012 should dampen inflationary pressures, but even so, there is no guarantee that inflation will not drift out of the central bank’s targeted band. We see inflation at 4.1% in December 2012 and economic growth of 1.9% in 2012.
Romania plans to shield banking sector from worsening Eurozone crisis
Romania plans to launch a new facility whereby the assets and liabilities of any insolvent bank could be taken over, the central bank said on Monday. This move is a leg-up for the local financial sector against potential deterioration in the Eurozone. The funding of the so called ‘bridge bank’ will come from the Banks’ Deposits Guarantee Fund. The assets and liabilities takeover will cover a two-year span or until ownership can be signed over to a strategic investor agreed by the central bank. The project, which is subject to government approval, should be put in place as soon as possible said Deputy Governor Cristian Popa. Around a sixth of Romanian banking assets is held by Greek banks. The banking sector is sitting pretty in terms of capitalization, with an overall solvency ratio of 14%.
Key comments by IMF/EU joint mission at the end of the third economic review
Romanian economic growth of 1.5% in 2011, and 1.8-2.3% in 2012; IMF and EU acknowledge that the advance could be slower than the actual estimates.
2012 budget deficit target of 1.9% of GDP (cash standards), or below 3% (ESA 95), is very ambitious; the IMF and EU want the government to pursue a prudent budget policy next year and they will keep a close watch on that.
Fulfilling the 2012 budget deficit target will require tough measures ahead, including a freeze on public wage and pensions; there could be hikes in wages and pensions in 2H11, but only if the budget can take that; however, the IMF/EU urged the government to abide by the ‘Fiscal Responsibility Law’ and avoid anywage/pension hikes for six months prior to the elections.
Public investments based on EU funds absorption should remain front and center;
Romania has eliminated almost all the arrears in both the state budget and the local administration budgets; however, the authorities have only recently started to address the state companies related arrears, which stand now at an estimated 4% of GDP;
EU funds are an important source of growth which have so far been underexploited; the steps taken by Mr. Orban in terms of project prioritization and re-allocation – where necessary – are welcomed by IMF and EU;
The last few months have witnessed progress in terms of getting some companies ready for privatization; but there are still many areas where progress is insufficient; Romania cannot fully benefit from the advantages of foreign capital unless it sells majority stakes in state companies; there is a strong need for capital, especially in energy.
The local banking sector has overcome the crisis; the central bank remains vigilant in its capacity as supervisory authority; the best strategy is to be ready to cope with whatever may come;
Under the current IMF/EU deal, Romania is relatively well-positioned; IMF is confident the current agreement will remain a precautionary one, and that no material aid will be necessary;
The IMF/EU do not recommend an immediate alignment of energy prices to those at the international level; Romania imports natural gas at a very high price from Russia and sells it to the final consumer at a very low price; a wise strategy for Romania would be to charge a fair price on natural gas, while diminishing consumption; this will stimulate local producers to increase production; Romania should pull the plug on schemes whereby ‘smart guys’ can reap unfair profits;
The government should not subsidize over-consumption of electricity by households; natural gas/electricity savings should instead be encouraged.
September industrial production surprisingly high
Romania ramped up industrial production in September (+15% m/m and 5.5% y/y – gross terms). The capital goods industry was the key driver behind the good performance of Romanian industry in September, soaring by 44% m/m, while intermediate goods were up 8.1% m/m. New orders for manufacturing climbed more than 25% m/m in Sep-11, supported mainly by capital goods and durables. Industryslowed to 6.8% y/y (gross terms) in the first nine months and the downtrend is likely to continue in 4Q11 considering the endless stream of bad news presaging bleak prospects for Eurozone (September industrial production in Germany fell2.7% and the decline was driven by manufacturing).
Exports are gradually slowing down, but so far the annual pace of growth is good (24.6% in the first nine months).Imports are also slowing down (+19.1%), but at a slower rate and this could be an indication that inventories continued to build up as long as private consumption is feeble. Total exports amounted to EUR 33.5bn in the first nine months, whereas imports (CIF) stood at EUR 40.3bn. The structure of exports remained pretty much unchanged, with machines and transport equipment holding more than 41% of total exports. The 12-month rolling trade balance deficit (FOB-CIF) was down 3.9% standing at EUR 9.4bn.
