Weekly Financial Focus - February 10

10 Februarie 2012

BANCA COMERCIALĂ ROMÂNĂ S.A.

 

Macro and real economy – highlights

Parliament appoints new cabinet

In the wake of PM Boc’s resignation and after consultations with all political parties, President Basescu last Monday nominated independent Mihai Razvan Ungureanu, the head of the foreign intelligence service, to form a new cabinet in the next ten days. The appointment of Ungureanu as PM should be seen as a trade-off attempt by Basescu among the opposition asking for a technocrat cabinet and the ruling coalition demanding a political cabinet. Under an emergency procedure, the PM-designate lined up the new members of the future government, proposing a replacement of the exdemocrat-liberal ministers with members of the same party and pledged to follow through on the reforms launched by the outgoing cabinet. Dissatisfied with the solution worked out by the president, the leftist opposition who had previously asked for early elections, and even the resignation of the incumbent president, has remained adamantly opposed to the new government and said that they will boycott the confidence vote in the Parliament.

In a recent interview, the head of the IMF/EU review mission for Romania said that he did not expect any radical chances insofar as the precautionary stand-by arrangement is concerned, while the economic policies Romania has embarked on in the last two years will be continued. He added that the IMF is open and willing to meet the new PM after the cabinet is greenlighted by the Parliament. In separate press conference, at the end of the fourth economic review, the chief of the IMF/EU review mission for Romania, Jeffrey Franks, said that the Romanian economy is expected to advance 1.5-2% (from the previous 1.8-2.3%), as the Eurozone is likely to tip over into recession. The IMF and EU again acknowledged the progress Romania has made in terms of fiscal consolidation, but specified that the country should push forward with further public reforms pointing at the ailing and resourceintensive health care system. Speaking about wage/pension hikes, the IMF representative said that results in 2H12 will tell whether such a move can be implemented or not. Regarding the price for utilities, Franks said that the price liberalization scheme for private individuals is due to start in 2013 and will be phased in until 2017, while for companies the deadline for full price liberalization is end-2013.

As expected, the new government won parliamentary approval on Thursday with 237 MPs from the coalition and from ethnic minorities other than Hungarians voting in favor. Although the opposition boycotted the confidence vote, the leader of the socialists, Victor Ponta, and a few other members of the Social-Democrat Party attended the special parliamentary session and gave a toned-down speech that riled liberals, their key partner.

Romanian markets did not seem too concerned with the recent political muddle, while all eyes must have remained riveted on the successful review of the IMF/EU precautionary stand-by arrangement. The MinFin held another successful tender on Monday, when it managed to raise more in 1-year Tbills (RON 1.8bn) than initially planned (RON 1.5bn). Investors put in bids totaling RON 4.3bn, which corresponded to a bid-to-cover ratio of 2.3. The average yield continued to drift down to 5.9% (-31bp compared to a similar auction held three weeks ago).

However, the situation was a bit different with the FX rate, with the leu weakening on Wednesday to a four-week low against the euro (4.36), while investors were waiting to see whether the new cabinet receives the confidence vote from the Parliament. Despite the appointment of the new cabinet, the leu remained pretty much flat, closing the trading session at 4.35.against the euro. So far we stick to our baseline forecast and see the leu trading within the 4.32-4.35 for the best part of 2012, with central bank stepping in to dampen high volatilities.

Central bank notched up inflation forecast for 2012

In its latest inflation report, the central bank nudged up its inflation forecast to 3.2% for end-2012, from the previous 3%. Among the main upside risks to inflation, the central bank reiterated the liberalization of administered prices, RON volatility, fiscal slippage and possible reluctance regarding the implementation of further reforms (in view of the election year), erratic developments of food prices as well as the treacherous international environment, including tensions in the Middle East that could impact the oil price.

At the presentation of the new inflation report, the governor said that the central bank will take immediate action if the situation on the domestic capital markets deteriorates after the resignation of the PM. So far, the political shocks were absorbed in an orderly manner by the markets as all of the changes took place within the constitutional framework, the governor added. He also said that the central bank will not provide liquidity to the banks via repo transactions for maturities longer than one week. Romania’s calendar for euro adoption should be discussed again after the elections, he added.

Industry beat expectations and exports hit new historic high in 2011

Industry ramped up production by 5.6% in 2011. Top growth rates in manufacturing: machines & equipments (14.5%), wood processing (12.9%), electric equipments (12.6%), non-metallic minerals (12.6%), automotives (9.2%), chemical industry (8.8%), pharma (8.5%), metallurgy (7.3%).

Exports ended 2011 on a pretty solid note, growing by almost 21% y/y. The positive export-import growth differential tapered off, but remained positive throughout 2011. Last year, exports surged to a historic high of EUR 45bn, compared to EUR 37bn in 2010, while imports (CIF) amounted to almost EUR 55bn. Machines and transport equipment and other manufactured products delivered 69% of the total export growth, thanks to robust demand coming from both EU27 and non-EU countries for most of the year.

We expect exports to lose further momentum, as the Eurozone - the main trading partner of the country, taking in 55% of total Romanian exports - is likely to experience a downturn, although some expect the recession in the Eurozone to be shorter than the previous one. The export slowdown/decline, combined with poor inflows of FDIs, will weigh down the economic outlook for Romania in 2012. If we add that agriculture will not be as supportive as it was in 2011, due to an unfavorable base effect and harsh drought last fall, alongside the ongoing fiscal consolidation, aiming to bring the budget deficit in line with the Maastricht criteria (3% of GDP under ESA), one can easily infer that the local economy will at best edge up by 1-1.5% this year.

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