Weekly Financial Focus - December 2

2 Decembrie 2011

BANCA COMERCIALĂ ROMÂNĂ S.A.

• Temporary divergence between Romanian economic sentiment and the rest of Eurozone
• Budget deficit down 44% in first ten months
• Yields marginally up, volumes down at the latest T-bills auction
• BSE: Following the trend of the mature markets

 

News & real economy

Temporary divergence between Romanian economic sentiment and the rest of Eurozone

It is most likely that sagging sentiment in the Eurozone will gradually rub off on the local market, although economic sentiment in Romania was looking up in November. The temporary nature of the divergence is perhaps thrown into sharper relief by the recent assessment of Moody’s, which cautioned that ‘the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns’.

Industry in Romania, which relied pretty heavily on external demand, is likely to be the first to feel the brunt and a good indication for that are slowing exports and inventories running down. It is noteworthy, however, that exports outside the EU have slackened much more quickly than EU ones, showing that ‘the rest of the world’ is also facing tough times. Industry could be positively impacted by an increase in energy production as the cold season sets in and this may somewhat alleviate its fall in the last quarter of the year.

Construction confidence began to buckle, while local managers anticipate a decline in new orders and contracts as of November. The government’s stronger focus on channeling public funds towards infrastructure and a perky commercial segment dominated by significant expansion of big commercial centers and malls pushed theconstruction sector up in 3Q11 by more than 7% y/y, with a positive impact on GDP growth. Interestingly, local managers are upbeat about the future trend of retail sales, and their view has long been at variance with waning consumer confidence and actual numbers of retail sales in the first nine months (-4.7% y/y). The flurry of new ‘openings’ and price discounts granted lately by big retailers may help retail sales volumes in the last quarter. Under these circumstances, economic growth could fall off in the last quarter of this year to 1.5-2.5%, impacted mainly by negative trends in industry and exports.

Budget deficit down 44% in first ten months

The deficit of the consolidated state budget (cash standards) stood at 2.4% of GDP, at the end of October. Austerity moves adopted under the IMF/EU arrangement trimmed personnel and social expenditures so far by 13% and 1.1% respectively. Also, capital expenditures, including projects benefiting from EU assistance, rose by more than 28% during January-October, while the government showed much greater commitment towards increasing EU funds absorption. So far, Romania is well on track with public reform and fiscal consolidation and there is a good chance of meeting the budget deficit target set at 4.4% of GDP for 2011 (4.9% under ESA95). A big leap forward was made last week when the ruling coalition passed key legislation on social assistance which aims to put the social system in Romania to rights and avoid the squandering of public money.

The cabinet has also adopted – albeit a little late – the 2012 draft budget built around a sharp reduction in the budget deficit to 3% (ESA), and has committed to further slimming down the sprawling public sector (maintaining the replacement rate of 1 to 7 departing workers). The budget has yet to be endorsed by the parliament in the coming weeks. The elections slated for the next year may cast a pall over public finances, and we do not rule out a minor fiscal slippage in 2012, not least because the budget revenues, with a forecasted economic growth of 2.1%, now seem a little overblown. We see economic growth crawling at 1.2% in 2012 and a budget deficit at 3.4% of GDP in 2012 (ESA). The EUR 5bn IMF/EU deal is likely to remain precautionary, but further deterioration of the Eurozone outlook is likely to turn investors more sour towards this region risk-wise and this will make it more difficult for Romania to secure foreign funding to finance the budget deficit. If yields on international markets remain prohibitive for Romania, the central bank could lend a hand to the MinFin by cutting mandatory reserves on FX liabilities to provide cheaper funding under the form of a club loan or a EUR-denominated T-bond issue.

Yields marginally up, volumes down at the latest T-bills auction

The MinFin borrowed less than 1/3 of the planned amount at the most recent auction for 1-year T-bills. They sold 1- year T-bills worth RON 249mn at an average yield of 6.65%, a shade higher than 6.64% two weeks ago. Investors submitted total bids worth RON 1.2bn. Budgetary execution is supportive at present and non-market funding alternatives exist if global markets do not settle down in the near future. If the external situation gets worse in 2012, the MinFin could turn to EU funding as part of the precautionary stand-by arrangement with the IMF and EU or could issue EUR-denominated bonds on the local market coupled with a cut in the FX minimum reserve requirement.

 

FX, money market and FI

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