Weekly Financial Focus - January 13
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13 Ianuarie 2012 |
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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
Macro and real economy – highlights
Central bank cut key rate for second consecutive time
The move was no longer a surprise for the market, and most analysts hit the nail on the head this time. The central bank lowered the monetary policy rate by 25bp to an all-time low of 5.75%, while maintaining unchanged mandatory reserves both on RON and FX liabilities. In its detailed press release, the National Bank outlined the main facts and points behind the recent decision. The most important was slowing inflation expected to stay close to the midpoint of the targeted range (3%±1pp) as in December 2011. Moreover, the NBR sees disinflation as gaining speed in the coming months, amid further easing of inflationary expectations.
Secondly, even though the economic recovery continued following a bumper crop in agriculture and supportive industrial production, non-government lending is still weak, feeling also the brunt of negative risk perception sweeping across the banking sector in Europe. The central bank also notes that the gradual adjustment of the monetary conditions will not only help Romania see a healthy economic recovery, but will also encourage the internal saving process, with a view to improving the sustainability of the external imbalance and reducing the country’s dependence on foreign funding.
Our view: Undoubtedly, the central bank is watching closely the country’s economic performance insofar as uncertainties on the international stage will again give all a hard time in 2012. Romania will definitely have to cope with a pretty fuzzy outlook for the Eurozone, which is now roundly seen as stagnating this year; Romanian exports are likely to slow down significantly (Ford could give exports a boost starting in 3Q12, when the new B model goes into production), while FDIs could recede further amid tepid investor confidence.
On the other hand, headline inflation in Romania will continue to ebb to as low as 2-2.5% in 2Q12, although there will be some hikes in administered prices (electric energy, natural gas, thermal), and also higher excise duties. Thus, there is room for another 25bp cut in the key rate in 1Q12 and the continuation of the IMF/EU deal, while delivering on the agreed fiscal targets for 2012, or perhaps concluding a similar type of arrangement with the World Bank this year, support our view. On the flip side, a lower key rate and a shaky international environment could keep the leu under pressure. However, Romania is sitting pretty in terms of foreign reserves (~EUR 32bn, covering more than seven months of imports) and this will allow the central bank to put the managed floating rate regime to good use.
Industry livened up in November
Except for the production of intermediary goods, all industrial segments perked up in November m/m, following a supportive trend in new orders (domestic and external). Overall industry advanced by 2.2% m/m (n.s.a.) and 6.3% in the first 11M12. Romanian industry has so far performed better than expected, considering the dreary outlook looming ahead for the Eurozone. Actually, this is not too much of a positive surprise, since - as we noted in early December 2011 - there was a temporary divergence between the November economic sentiment in Romania and the Eurozone; industry was a case in point. Considering the positive results that industry has delivered so far, we now see industrial production advancing by around 5,9% for the whole year 2011.
November exports – at second highest monthly record in 2011
Exports in November held steady, reaching their second highest level for the year 2011 (EUR 4.1bn). The positive export-import growth differential maintained throughout 2011, with exports growing by almost 23% y/y in the first 11M11, while imports were up by 18%. Interestingly, imports exhibit a stronger resilience to slowing down, as domestic new orders are increasingly more visible and this affects the overall performance of the net exports (GDP-wise).
Although important changes have been seen in the exports structure in Romania, low innovation is still commonplace among the local export products, according to a local report developed by CoNaCo (National Council for Competitiveness). The report also highlighted low marketability for Romanian export products (structural rigidity of offers, especially in the segment of high value added products). Indeed, despite robust growth in Romanian exports in the last two years (+31% compared to 2008), the country is still a laggard in terms of exports/capital.
Inflation close to mid-point of CB’s target range in 2011
Our inflation estimate matched the actual reading of CPI in December (0.2% m/m), while the market consensus was this time more pessimistic (0.4% m/m). RON appreciation and moderate price growth across the board (food, non-food and services) helped inflation drop to 3.1% in December from 3.4% in the previous month. After five years, headline inflation ended 2011 within the CB’s targeted range. There were still some hiccups in the prices of some items such as ‘vegetables’ and ‘eggs’, which usually show a pretty high resilience to decline, especially during the winter season.
Disinflation will continue in the first six months of 2012 and CPI is likely to reach an all-time low of 2-2.5% in 2Q12. A favorable base effect could also lend a hand to disinflation, especially in the first half of the year.
Domestic demand will pose no threats to inflation throughout 2012, as the economy will grow well below its long-term potential, estimated at 3.5%. However, a less auspicious agricultural year and further hikes in some administered prices are likely to push inflation towards the upper end of the CPI targeted range (3%±1pp) in 2H12. We see inflation at 4.1% in December 2012.
