Weekly Financial Focus - December 16

19 Decembrie 2011

BANCA COMERCIALĂ ROMÂNĂ S.A.

• Romania to join bandwagon of new fiscal governance framework
• Opposition to initiate no-confidence motion
• Inflation edged down y/y in November
• Yields drifted down on primary market
• BSE: SIFs caught investors’ eyes

 

News & real economy

Romania to join bandwagon of new fiscal governance framework

After green-lighting the inter-governmental agreement in Brussels last week, President Basescu summoned all parties on Wednesday in order to sound them out about this issue, as this arrangement is to be ratified by the Parliament. The outcome was positive, with all political leaders backing the treaty, and reassuring that theConstitution will be revised in due time to reflect the fiscal benchmarks derived from the new fiscal governance treaty. The deadline for the inter-governmental agreement to come into force is March 2012.

From a political point of view, the new European fiscal governance project comes right on cue and should be seen as a way of fighting off populism, especially in election years. Based on past experience, we have constantly expressed some concerns about a ‘minor’ fiscal slippage, which is likely to occur next year, when Romania will see both local and general elections. It is no less true that, this time, the overall economic context will remain restrictive, somewhat kicking the habit of overspending in an election year. Moreover, the IMF/EU will also keep a close watch over the budget execution and this too may prevent political enthusiasm from spiraling out of control.

Romania has managed to cut the structural budget deficit to an estimated 3.5% this year, from more than 8.4% in 2009, and the current IMF/EU arrangement has acted as an early catalyst in putting the country’s public finances back on track. Romania is only partway through the fiscal consolidation, and further efforts are needed to bring the structural fiscal deficit down to 0.5%, as stipulated by the Brussels agreement. The best possible news for Romania in 2012 would be meeting the targets agreed with the IMF/EU under the precautionary arrangement and assumed in the 2012 budget passed by the Parliament. We still maintain a cautious stance regarding the 2012 budget, as the amount of revenues seems too optimistic, as does the official economic growth forecast of 2.1%. We see the local economy edging up 1.2% in 2012 and a budget deficit of 3.4% of GDP in 2012 (ESA).

Opposition to initiate no-confidence motion

The center-right coalition in power has approved two bills on merging elections scheduled for the next year and the appointment of magistrates at the Court of Cassation, and the cabinet yesterday assumed responsibility on these two laws. The rationale behind the bill on merging the elections in 2012, according to the government, is the difficult times the country is going through and the further need to cut down on public expenditures as part of the fiscal consolidation process.

The move is estimated to save around EUR 20mn, the prime minister was quoted as saying. No sooner had the coalition announced the election merger back on Monday than the opposition retaliated with a press statement announcing a no-confidence motion, warning that they would challenge the two bills in the Constitutional Court.The motion will most likely be put up for debate next week, but the current structure of the Parliament leaves little room (if any) for a surprise, as the ruling coalition has the upper hand in both chambers of the Parliament.

Inflation edged down y/y in November

Although the reading came in pretty high in November (0.42% m/m), a strong base effect saved the day for the annual CPI which inched down to 3.4%. Vegetablesremained off the chart speeding ahead at an impressive 3.9% m/m in November, as the seasonal impact of bumper crop in the summer wears off. The significant mark-up in the price of vegetables pushed inflation up in November by more than 0.1bp. Inflation would have stood at 3.3% y/y if the average price of vegetables had remained flat. Weakening RON in November fed instantly through to the phone fees pushing them up by 0.7% m/m. This combined with the high growth rate in the price of water and sewerage (2.2% m/m) led to a run-up in the service prices by 0.63% m/m in November. Fuels proved supportive (-0.16m/m) and were a downward driver for CPI in November (7.6% in the consumer basket).

We see inflation hovering at 3.5-3.6% y/y in December. Inflation is likely to remain within the central bank target range until 3Q12 (3% ±1pp), but we acknowledge that a poorer agricultural year and further hikes in administered prices could make inflation drift a little earlier above the upper limit of the central bank’s target.

Yields drifted down on primary market

The MinFin sold RON 1.4bn in 11-month T-bills on Monday – above the planned RON 1.2bn – at an average yield of 6.6%, slightly less than in a similar tender held in late November. The central bank also held a repo auction on Monday, injecting more than RON 7.6bn into the market. This may have helped yields drift down on the primarymarket. We see 5-year yields at 7.2% in March 2012, but acknowledge that the fickle international context poses upside risks to our scenario.

 

FX, money market and FI

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