Coface - Macroeconomic Report HI 2012

7/29/2019 Coface - Macroeconomic Report HI 2012

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Romania

Macroeconomic Report

SI 2012

Table of contents Page

Summary 2

Strengths and challenges 3

Economic growth and short-term evolution of indicators 3-7

Payment balance, investment position and absorption of European funds 8-12

Fiscal consolidation 12-14

Public debt 15

Investors' perception about Romania 15-17

Monetary policy 17-19

Financial intermediation 20-21


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Summary

Economic growth of maximum 1% in 2012, because of the basic negative effect in agriculture in the thirdquarter of this year. The stagnation of exports and industrial production corroborated with a limited evolution of internal

demand completes the image of an economy which will arise, below its potential in the next 2 years.

The adjustment of external (current and commercial account) deficits continued in the first half of thisyear, on the background of the increase of exports in the detriment of imports.

The low degree of diversification of DFI sources by country categories, the increase of higher-volatilityportfolio investments in the structure of private capital incomings from the payment balance, thereluctance of foreign investments to roll their state bonds and the new fiscal pact signed by Romania in

March 2012 which reduces the freedom of movement on the level of the fiscal-budget policy are reasons

for doubt regarding the potential and cost of financing the budget deficit and covering the debt service.

Under these conditions, the increase of the degree of absorption of European funds should be a priority forthis Government. Given that the absorption rate from the budget allocated for 2007-2013 is only 17%

(March 2012), the potential for significantly improving this indicator this year is slim.

The consolidated general budget recorded, after the first 6 months, a deficit of 1.12% of GDP (comparedto the annual deficit agreed with IMF of 2.2% of GDP). Thus, the consolidated budget deficit for the firsthalf of the year was 6.79 billion RON, compared to the threshold negotiated with IMF of 7 billion RON.

However, reaching the deficit target for this year is very difficult, and without additional adjustments,

there is a high probability that this target will be missed.

The increase of fiscal revenues in GDP (the current level is around 33%, much lower than the onerecorded by the New Member States, namely 39%), the reduction of underground economy (after

Bulgaria, Romania has the second highest weight of fiscally unaccounted economy from GDP in the EU

area) and the reduction of the structural deficit are the main challenges in the process of fiscalconsolidation in progress.

Public debt as weight from GDP is low (36% at the end of June 2012) and is not a problem size-wise, andthere are preoccupations regarding certain structure elements (weight of the term debt and foreign

currencies debt is increasing, which may cause the growth of the refinancing or debt rollover necessities)and the financial potential in a context in which internal supply is insufficient, and the aversion to risk on

external markets is still high.

The consensus of the market places the EUR/RON evolution at the end of this year in the interval 4.50-4.60, and indicates the fact that it will require two more quarters in order to get close to the level of 4.4

RON/EUR. Currently there are no concrete arguments indicating the decrease of the pressure on thedepreciation of the national currency in the next two quarters.

In the context of additional pressure in the 2nd semester (increase of food product prices, adverse basiceffect compared to the 3rd quarter of last year), annual inflation will continue to increase in the second

half of the year to 4%-4.5%.

The local banking system continues to be affected in 2012 by a high level of bad loans.


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Strengths and challenges

Strengths Challenges

Relatively large domestic market, Significant foreign currency reserve, Public indebtedness below the EU average.

Pro-cyclical governmental economic policies, High indebtedness of the private sector, High current account deficit (compared to the New

Member States) Political instability, Lack of fiscal predictability, Low degree of European fund absorption, Low level of governmental revenues as percentage

of GDP.

Economic growth... dynamics which is relevant only statistically. Growth below potential!

After two quarters of marginal growth, the

preliminary data published by the NationalInstitute of Statistics shows a positive

dynamics of GDP in the second quartercompared to the previous quarter (0.5%higher, seasonally adjusted series) and to

the same quarter of 2011 (1.7% higher,

seasonally adjusted series). Thus, in the

1st semester of 2012 GDP

% variation compared to the previous quarter (seasonally

adjusted series)

Source: National Institute of Statistics, Eurostat, data processed by Coface

increased compared to the 1st semester of 2011 by 0.8% per gross series and by 1.4% by seasonally adjustedseries. Compared to the rest of the EU member states, Romania recorded the 4th growth in this semester, after

Sweden, Latvia, Poland, Estonia, Lithuania and Slovakia. After stagnation in the 1st quarter, EU recorded a

decrease in the 2nd quarter by 0.2%. The continuation of the downward trend noticed at the end of last year

confirms the expectations of Coface for a slight recession in the Euro area in 2012. It is noteworthy that

Germany continues to record variations below the potential level, and France is in its third consecutive quarterof stagnation.

Source: National Institute of Statistics, National Bank of

Romania, data processed by CofaceSource: National Institute of Statistics, National Bank of Romania,

data processed by Coface


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Although the dynamics from the last quarter is positive, it is very important to emphasize the following

aspects:

With a potential growth level of 2.5% (according to the spring estimates of the European Commission)the dynamics of GDP of the last year shows that Romania records a growth below the normal level.

Consistent quarterly increases of over 1% are necessary in order to confirm the real end of therecession.

As estimated, industrial production and exports, the engines which supported the recovery of theeconomic activities in 2011, recorded modest increases in the 1st semester of this year. Thus, on the

background of fragile external demand, in the 1st semester of 2012, compared to the 1st semester o

2011, industrial production increased as seasonally adjusted series by 0.9%. According to the paymenbalance (source NBR), in the first 5 months of this year compared to the same period of last year

exports recorded a nominal increase of approximately 3%, while imports increased by only 1.3%

Thus, commercial deficit recorded a decrease of approximately 10%, and had a marginal andinsignificant contribution to the increase of GDP.

The fragile increase from the 1st semester was especially due to the growth of internal demand and othe construction industry. Both variations are especially determined by a positive basic effect recorded

in the first two quarters. Thus, the adverse meteorological conditions from the first quarter (especiallythe abundant snowfall of February) had a negative impact on both trade and construction industry. Due

to the stabilization of meteorological conditions in the 2nd quarter, the impact on consumption and the

construction industry was positive.

However, the high temperatures of July (highest temperatures in the last 52 years according to INMHwill have a negative effect on agriculture. Thus, compared to the previous year, when agricultur

recorded results which were far superior to the average of the latest years, this activity sector wil

negatively contribute to the formation of GDP. In the absence of measures for the recovery of economic activities in the second half of this year, the

strong negative impact of agriculture leads to the estimate that the real growth of GDP in 2012 will be

of maximum 1%.

It is noteworthy the significant contribution which agriculture and meteorological conditions have onthe dynamics of GDP, which induces a precarious sustainability, predictable to a small extent. Anoticed in Figure 2, by eliminating the positive impact of agriculture on the formation of GDP, the rea

growth recorded in 2011 would have been only 1.74% compared to the actually recorded percentage o

2.5%. This dynamics has a structural effect on sustaining budget revenues, given that agriculture is asector of activity with poor fiscal control and which records a negative fiscal net ratio (fiscal revenue

from agriculture - public expenses and subsidies).

The stagnation of exports and industrial production corroborated with a limited evolution of internademand completes the image of an economy which will advance below its potential in the next 2 years


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The economic growth, which is below itspotential level is also reflected on the

GDP/inhabitant dynamics. Thus, expressed by

the purchase power standard, Romania lost2% to the EU12 average compared to the level

recorded in 2008. Thus, at the end of 2011,

GDP/inhabitant PPS in Romania was 11,685,which represents 46% compared to the EU12average.

Regarding the nominal GDP per inhabitant,Romania is last but one in EU, with 6,200EUR/inhabitant at the end of 2011, with

Bulgaria last.Source: Eurostat, data processed by Coface

Regarding the use of GDP in 2012 and compared to the Euro area, we notice the following structural factors:

The economy of Romania, like the others from the Balkan area, is predominantly based onconsumption. The only difference from the average of EU27 and the New Member States is that in

Romania the private sector has a higher weight in the use of GDP, unlike the governmental sector

which has a lower weight. (Figure 4, respectively 5) Another structural aspect is the weight of GDP allocation for the gross formation of capital, which in

the last 5 years was far superior to the average of EU and the New Member States (Figure 6)

Source: Eurostat, data processed by Coface Source: Eurostat, data processed by Coface Source: Eurostat, data processed by Coface

Factors which may deteriorate the estimated

economic growth for 2012:

Continuation of uncertainties from thefinancial markets and the negative

development of sovereign debts from the

Euro area, which will have an immediateimpact on domestic growth by the

commercial and financing channels

Continuation of the local political crisiswhich will cause the loss of trust from

international investorsSource: Eurostat, NSI, data processed by Coface


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Possible additional necessities for the recovery of debts by the private environment, stimulated by theincreasing saving rates from the banking sector, which will have an additional negative impact onconsumption.

Factors which may consolidate the economic growth of this year and 2013

Although improbable, a significant increase in the European fund absorption degree A contribution stronger than estimated of internal demand during elections.

Evolution of short-term indicators

By analyzing the evolution of short-term indicators in Romania and compared to the dynamics of the Euroarea, we notice the following:

Considering that in Romania in the 1st semester of 2012, compared to the 1st semester of 2011industrial production increased as adjusted series by only 0.9%, and the aforementioned dynamics i

mostly explained by the selection of the reporting basis, as Romania had a lower starting point in 2005

caused by the consolidation convergence process.

In the 1st semester of 2012, compared to the 1st semester of 2011, the volume of construction workincreased both as gross series and as adjusted series depending on the number of business days and

seasonality, by 7.5%, respectively 7.7%. The dynamics is higher than the increase recorded in the 1s

quarter (+1.1% as gross series and +1.4% as seasonally adjusted series) and the more significanincrease from the 2nd quarter is mainly due to the very adverse meteorological conditions from

February of last year.

According to Eurostat, Romania recorded the second largest increase from EU27 in the volume oconstruction works compared to the reference year 2005, respectively 151%. The first position was

occupied by Poland, where the average increase was 194%. The highest decreases were recorded by

Spain (-57%), Hungary (-42%) and Portugal (-41%).

In the 1st semester of 2012, the retail turnover (except for the trade with cars and motorcyclesincreased compared to the 1st semester of 2011, both as gross series and as series adjusted by thenumber of business days and seasonality, by 4.1%, respectively 4.4%.

2005 = 100, mobile mean 6 months

Source: NSI, data processed by Coface


Source: NSI, data processed by Coface2005 = 100, mobile mean 3 months

Source: NSI, data processed by Coface


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Source: Eurostat, data processed by Coface

% same moth previous year, mobile average 3M


2005 = 100, mobile average 6 months, series

adjusted seasonally and by the GDB deflater


The positive evolution of short-term indicators both internally and compared to the dynamics recorded in thEU27 area, is also sustained by the improvement of the level of trust in the corresponding sectors. Thus

Romania recorded at the end of the first semester of this year a level of trust in the construction sector and

retail higher than the average of the EU27 area, Balkan countries or the new Euro area member states.

Source: Eurostat, data processed by Coface Source: Eurostat, data processed by Coface Source: Eurostat, data processed by Coface

Payment balance and investment position... signs of financing doubt

The current account deficit recorded at the end of May 2012 was 1.9 billion EUR, 22% less than the same

period of last year. The decrease is mainly due to the decrease of the trade deficit by -12%, on the background

of the increase of exports superior to the increase of imports.


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Source: NBR, data processed by Coface, 2012_H1* - includes five months (January - May)

On the background of the uncertainty from the Euro

area, the aversion to risk of investors and the recent high

political instability, DFI (direct foreign investments)dropped in the first 5 months of this year by 45%

compared to the same period of last year, given that thereporting level was very low anyway!

Compared to the level recorded in 2008, Romania

recorded in 2011 one of the most abrupt DFI decreases

(-80%) in the EU27 area, as only Bulgaria and Estoniarecorded greater decreases.This fast decrease of DFI creates doubt regarding

alternatives for financing the current account deficit.

Source: NBR, data processed by Coface

Thus, the degree of covering the current account deficit by DFI recorded at the end of May this year droppedto 26%, compared to 36% recorded in the same month of last year. The prospects are pessimistic, given that

Romania has one of the highest levels of DFI from the EU area, where the consensus of the market is thathere will be a slight recession this year and a below-potential increase in the next 2-3 years. Moreover, the

concentration degree of DFI in the area of high-end investors increased in the recent years, showing a highdependence on them. Thus, the top 5 investors in Romania in 2011 were Austria, Italy, Germany, France andSpain, and these countries amounted to 73% of DFI.


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Source: Eurostat, data processed by CofaceSource: NBR, data processed by Coface

By analyzing the structure of private capital incomingsfrom the payment balance, we notice an increasecontribution of portfolio investments, which may

present a higher volatility. Thus, the peak of portfolio

investments in 2012 was in February, correlated withthe issuance of 10-year maturity bonds in USA, with a

total value of around 1.5 billion USD. In May of this

year the balance of portfolio investments decreased by

50%, because of capital outputs of approximately 1billion EUR caused by Euro bonds reaching maturity.

The data published in May by the Ministry of Financeregarding the investment instruments denominated in

RON owned by non-resident investors show a drop of

9% compared to the peak recorded in February, which

may indicate a decrease of the interest of investors forlocal investment securities.


By analyzing the dynamics of the current account deficit and the commercial deficit compared to the EU area

we notice the following:

Romania records one of the lowest levels of economic openness (cumulation of exports and imports inGDP), namely 89%, compared to the average recorded in EU27 or the New Member States, where the

openness of the economy exceeds 100%. Deficit corrections (current and commercial account) were caused by a series of circumstantial factor

rather than by locally controlled measures. Thus, the increase of external demand in 2010-2011 and the

decrease of internal consumption caused the contraction of the commercial deficit, which in turn

caused the correction of the current account deficit.

Even though the contraction rate of the deficits recorded in the payment balance of Romania was oneof the fastest in the EU area, the current level of deficits is still high compared to the average recorded

in the New Member States, which recorded at the end of 2001 a commercial excess of 1.43%.


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Compared to countries like Hungary, the Czech Republic or Poland, Romania continues to record ahigh current account deficit.

The coverage degree for the current account deficit by direct foreign investments recorded in Romaniaat the end of the first quarter is much lower than the average recorded in the New Member States

where the coverage percentage is above 100%, namely 113%.

Source: Eurostat, data processed by Coface Source: Eurostat, data processed by CofaceSource: Eurostat, data processed by

Coface

Source: Eurostat, data processed by Coface Source: Eurostat, data processed by Coface

The external balance will not record significant improvements in the next 2 years, because the structura

reforms that are necessary for the consolidation of the capacity of export and competitiveness have beeninsufficient so far. The diversification degree of the destinations of exports outside EU needs to be increased

(in 2011, 75% of Romanian exports were directed to the EU area), from where economic growth is expected in

the near future.


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Absorption of European funds

For 2007-2013, Romania benefits from 19.2 billion Euros by European structural and cohesion funds

Coordinated by the cohesion policy of EU, these funds are designed to support the convergence of member

states, the increase of competitiveness and the occupancy of the workforce.

Operation program

category

Total

allocations

2007-2013

Payments December 2011Absorption

rate

Absorption rate

(without pre-

financing)Total, out of

which:

Pre-

financing

EU

reimbursements

Regional development 3,726 929.5 513.1 416.4 24.95% 11.18%

Average 4,512 535 351.3 183.6 11.86% 4.07%

Transportation 4,565 139.8 0 139.8 3.06% 3.06%

Competitiveness 2,554 405.6 142.9 262.7 15.88% 10.28%

Human Resources 3,476 841.7 549.7 292 24.21% 8.40%

Development of the

administrative capacity208 24.5 5.5 19.1 11.80% 9.17%

Technical support 170 20.5 1.2 19.4 12.06% 11.38%

Total 19,213 2,896.70 1,563.70 1,333.00 15.08% 6.94%

Source: Fiscal Council, Report 2011

Given that the absorption rate from the allocated budget is only 15.08% at the end of 2011, Romania risks

losing these important opportunities. The operational program with the lowest absorption rate remainsTransportations, while Regional Development and Human Resources are the most efficient operationa

programs in absorbing European funds, with rates of 24.95%, respectively 24.21%.

Source: Fiscal Council, Report 2011

Five years after joining the EU area, the European fund absorption rate is much lower than the average of theNew Member States (17.3% compared to 33.9%, at the end of the 1st quarter of this year).

The own budget expense multiplication potential in the case of projects financed from EU funds is muchhigher than in the case of projects fully financed from own resources. Given the co-financing of only 5% in the


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case of projects with EU financing, for 1 RON own resources - budget deficit - budget expenses of 20 RON

can be made (EU fund absorption affects the budget deficit only as far as the co-financing is concerned, and

the money received from EU is also reflected in revenues and expenses), compared to an equivalence of 1:1 inthe case of projects fully financed from own resources.

1

Considering this fact and given the new fiscal pact which reduces the freedom of movement on the level of the

fiscal-budget policy, the increase of European fund absorption should be a priority for Romania in 2012.

Fiscal consolidation ... ambitious targets which require significant correction measures!

With the goal of consolidating the supervision of budget positions and enhancing the coordination o

economic policies, 25 EU countries (including Romania) signed in March 2012 the Treaty on stabilitycoordination and governance within the economic and monetary Union. Its main provisions are

2:

The budget position must be balanced or in excess. This rule is considered to be fulfilledif the annual structural balance complies with the medium-term budget objective (MTO) and does noexceed 0.5%

of GDP.

The structural deficit may be higher than the aforementioned value, up to maximum 1% of GDP, if thelevel of the public debt is significantly below 60% of GDP and the risks for the sustainability of longterm public finances are low.

States will implement a correction mechanism which will automatically trigger in case of significantdeviations from the medium-term objective or from the adjustment strategy.

The budget rule is introduced by permanent national provisions with mandatory legal force, preferablyconstitutional, or on another level that would guarantee the full compliance within the national budge

process. The aforementioned rules must be effective in the national legislation 1 year after the Treaty

becomes effective.

The states that record a public debt level of over 60% of GDP will have to reduce the differencebetween the recorded debt and the reference value with an average rate of 1/20 a year.

The deficit targets are ambitious, below the limit providedby the Maastricht Treaty of 3%, and represent the firststep towards a structural deficit budget of maximum 0.7%

of GDP in 2014, determined by the dramatic change of

the financial models following the crisis.

The consolidated general budget recorded, after the first 6

months, a deficit of 1.12% of GDP (compared to thedeficit agreed with IMF of 2.2% of GDP), on thebackground of an excess of 400 million RON in June.Thus, the consolidated budget deficit for the first half of

the year was 6.79 billion RON, compared to the threshold

negotiated with IMF of 7 billion RON.International financiers accepted during the Mayassessment the completion of budget salaries and theincrease of the deficit target from 1.9% to 2.2% from GDP (based on the liquidity methodology).

Source: Eurostat, convergence program for 2012-2015 for

ESA and structural deficits, European Commission - spring

2012 estimate

1Fiscal Council, Report 2011

2Ministry of Public Finances, Fiscal-Budget Strategy for 2013-2015


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Nevertheless, reaching the deficit target for this year is

very difficult, and without additional adjustments there

is a high probability that this quantitative target will be

missed (it would be the first time when such a misswould occur in the last three years of the IMF

agreement).

Main risks related to reaching the budget deficit target

for 2011:

Descending revision of the economic growthestimate

3

Avoiding the creation of new arrears Ascending dynamics of the expenses in the last

quarter

Elections towards the end of the year, whichmay cause an increase of expenses

Source: Ministry of Finance, data processed by Coface

Controlling the expenses for goods and services (which should decrease by 2% in the second half Proposal to postpone VAT collection until the payment of invoices 4, a measure which could pu

pressure on budget revenues

Structural funds are included in budget revenues, but potential blockages of the European Commissioncould negatively affect revenues and increase the budget deficit.

5

By analyzing the process of fiscal consolidation of Romania compared to similar countries from the EU area

we notice the low level of Romania regarding the weight of fiscal revenues in GDP. According to datapublished by Eurostat, Romania recorded at the end of 2011 revenues of approximately 33% of GDP

compared to the 39% average of the New Member States, 37% for the Baltic countries, respectively 44% in

EU27.

3 European Commission, Spring 2012 estimate, adjustment to 1.6% from 2.1%

EBRD - adjustment from 1.2% to 0.8%

The consensus on the local market (economic analysts) places the growth for 2012 at maximum 1% (compared to the prior

estimations of 1%-1.5%)4

Thus conditioned, the measure applies only to SME and for large companies if the in voices were issued to SME)5

The European Commission has already blocked in June-December 2011 funds from the Regional Operational Program -

Improvement of the regional and local transportation infrastructure. The deficiencies from the public procurement system refer to

the use of discriminatory selection criteria by contracting authorities in selecting building contractors, the unjustified use of the

accelerated procedure and additional works contracted as similar works.


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Source: Eurostat, data processed by Coface Source: Eurostat, data processed by

Coface


The main factors which explain this phenomenon are high bureaucracy and high corruption. According to theestimates of the European Commission, the underground economy of Romania amounted to 41 billion Euros

last year, and fiscally unaccounted economy represented 29.6% of GDP, a percentage exceeded in EU only by

Bulgaria.

Source Ph.D. Friedrich Schneider, Johannes Kepler University of Linz, Austria; A.T. Kearney analysis Shadow, European

Commission spring estimate 2012, Data processed by Coface

Euro e W Euro e S Euro e C-E


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Public debt

Compared to the average of EU27 (82% in 2011) andEU16 (87% in 2011), Romania has a low level of

public debt as a rate of its GDP, namely 36%

(balance in June 2012).

Alarming factors regarding the public debt dynamics:

Fast increase of the public debt rate in GDP from 21% in2008 to 36.4% in December 2011, with an increase ofapproximately 20 billion Euros in the last three years(fastest growth rate of the NMS)

Additional risks in the context of low fiscal revenues anda high impact of the Euro on the economy

Source: Eurostat, Coface calculations

Decrease of the % of public debt contracted in RON, from 64% in June 2009 to 46% in June 2012 Potential risk of financing costs for 2012-2013, a period in which Romania will start to reimburse the main

amounts of the credit line from the IMF agreement, in the context of the potential increase of CDS rates.

Source: Ministry of Finances, data processed by Coface Source: Ministry of Finances, data processed by Coface

Perception of investors on Romania - political risk

Even though the majority of macroeconomic indicators are not at all dramatic, by comparison, politicalinstability represented the main concern of the international investors. Capital outputs of approximately 1

billion EUR (caused by Euro bonds reaching maturity, which caused the decrease by 50% of the balance of

portfolio investments) and the 9% decrease of May compared to the peak recorded in February forinvestment instruments in RON owned by non-resident investors, are signs which indicate a decrease in the

interest of foreign investors for the local market. Investors reluctance to roll their funds in government

bonds at the end of the 2nd quarter is a sign of the lack of medium-term predictability in the political and

economic sectors.Also, political events represented one of the main reasons which caused the depreciation of the national

currency in relation to EUR and USD. The depreciation of the RON in July was enhanced by the political

situation of Romania, and the negative image induced by the actions of the current government, criticized by

foreign high officials, reflected in an aggressive reaction of foreign currency buyers on the background oflow or inexistent foreign currency supply. There is the risk that the difficult political environment maintains

the RON depreciation pressures on considerable levels, given that foreign capital incomings are estimated to

be low.


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Source: NBR, data processed by Coface Source: NBR, data processed by Coface

Period Sept 12 Dec 12 Mar 13 June 13 Dec 13

CNP

EUR/RON 4.40 4.37 4.35 4.35

AAFBR 4.49

BCR

EUR/RON 4.52 4.50 4.48 4.47 4.45

USD/RON 3.62 3.66 3.73 3.73 3.71

Raiffeisen

EUR/RON 4.45 4.45 4.40 4.40

USD/RON 3.50 3.48 3.44

ING Bank

EUR/RON 4.55 4.60 4.65 4.55

Citigroup

EUR/RON 4.40 4.30

USD/RON 3.64 3.50

Danske

Bank

EUR/RON 4.50 4.54 4.64

USD/RON 3.63 3.60 3.57

Source:http://www.businessmagazin.ro/analize/servicii-financiare/un-curs-

prea-mare-pentru-scandaluri-prea-meschine-9896224

We believe that the potentially positive impact which the depreciation of the exchange rate could have on

economic growth is limited, mainly due to the following reasons:

The earnings of exporters are partially compensated by the fact that exports from Romania have asignificant degree of import incorporation, and the depreciation of the national currency generates theincrease of costs.

In the absence of excess production capabilities which would ensure a fast elasticity of domesticsupply to external demand, the depreciation of the national currency cannot support medium-term

The consensus of the market places the

EUR/RON evolution at the end of thisyear in the interval 4.50-4.60, andindicates the fact that it will require two

more quarters in order to get close to the

level of 4.4 RON/EUR.In theory, the volatility on the currency

market should be normally transposed

into stability on the monetary market,

which means a predictability of interests.Practically, this model is implemented by

the central bank of Poland, which has

kept relatively stable interests, for theprice of a more volatile zlot. The effect

may be enhanced by the modification of

the crediting policy of the state, orientedtowards longer maturities (the weight of

short-term government debt dropped

from 30% in January 2012 to 23% in

June 2012, causing the decrease of

volatility on the monetary market).
http://www.businessmagazin.ro/analize/servicii-financiare/un-curs-%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20prea-mare-pentru-scandaluri-prea-meschine-9896224http://www.businessmagazin.ro/analize/servicii-financiare/un-curs-%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20prea-mare-pentru-scandaluri-prea-meschine-9896224http://www.businessmagazin.ro/analize/servicii-financiare/un-curs-%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20prea-mare-pentru-scandaluri-prea-meschine-9896224http://www.businessmagazin.ro/analize/servicii-financiare/un-curs-%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20prea-mare-pentru-scandaluri-prea-meschine-9896224http://www.businessmagazin.ro/analize/servicii-financiare/un-curs-%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20prea-mare-pentru-scandaluri-prea-meschine-9896224http://www.businessmagazin.ro/analize/servicii-financiare/un-curs-%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20prea-mare-pentru-scandaluri-prea-meschine-9896224


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Macroeconomic Repor

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17

sustainable growth. This requires investments for increasing the production capacity and improving

real (not nominal) productivity, mechanisms which take time.

One of the preferred mechanisms for assessing the perception of investors and the aversion to risk is CDS

(Country Default Swap), which measures the costs of insurance against sovereign bankruptcy. Practically, it

is an indicator of the insolvency risk of a state. The evolution of CDS reported by CMA (one of the most

important players worldwide in providing independent data for OTC markets) for Romania had a cyclical

evolution in 2012. Thus, the year started with 401 base points, a decrease after the maximum level ofNovember 2011 (451 base points). The decrease continued until the end of March, when it reached 314 base

points. The change of the government team and the political events enhanced the decrease of CDS for thenext two months, and at the end of May it was 447 base points. Subsequently, June closed the first semester

of this year with an ascending trend, as CMA reported a 5-year CDS of 411 base points.

We notice significant correlations between the evolution of Romania's CDS and the level of the exchange

rate, respectively the financing costs for new credits in foreign currencies, and the improvement of the

perception of investors on Romania's risk caused the increase of the exchange rate (by capital incomings)and the decrease of credit prices.

Source: CMA, NBR, data processed by Coface Source: CMA, NBR, data processed by Coface

Monetary policy

This year started with a level of the annual inflation of 2.72%

yoy, and approximately 2% at the end of the 1st year-half. Itwas the 1st year-half when annual inflation recorded values

between 2% and 3%, as inflation pressures from the first

year-half are low. The determining factors of inflation in the2nd quarter were mainly those which caused the decrease of

prices, as well as the persistence of the demand deficit, the

temporary relief of the pressure on international oil markets,the favorable influence of the external prices of raw materialsand of consumption goods.

In the last two months there was an increasing trend in this

regard. Thus, annual inflation increased in June to 2.04% yoy

compared to 1.79% yoy in May, respectively to 3% yoy in

July. The increase was mainly caused by a basic adverseeffect compared to last year, given that the prices of food



18/21

Macroeconomic Repor

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products decreased in Q3 2011 due to favorable meteorological conditions and a very good agricultural

production. Thus, July-September 2011 recorded consecutive monthly price decreases.The recent adverse meteorological conditions worldwide have caused the increase of grain prices in the 2nd

quarter of this year, after 3 previous quarters of generalized decreases. Thus, in July 2012 FAOCPI

(cumulated index of grain prices) reported by FAO (Food and Agriculture Organization of the United

Nations) increased by 17% compared to June 2012, respectively by 4% compared to the same month of last

year. The effect of very high temperatures on agricultural production and local prices was more severe. Thus,according to data published by MARD (Ministry of Agriculture and Rural Development), the price of bread

wheat increased in July 2012 by 10% compared to June 2012, respectively by 25% compared to the samemonth of last year. The published price of corn recorded similar evolutions.

Source: FAO, data processed by Coface Source: MARD, data processed by Coface Source: MARD, data processed byCoface

Besides the increase of the prices of food products, animportant challenge in the context of inflation pressures in

the 2nd semester is represented by the risk of entering an

inflation spiral. On one hand, the real average salary in theeconomy increased by 6% in June 2012 compared to thebeginning of the year, and the Government admits that it

has to breach the Law on fiscal-budget responsibility in

order to increase budget salaries and return to pensionerspart of their withheld health contributions. On the other

hand, the gradual completion of salaries in the budget

sector will be partially felt in consumption, and the similarincrease of productivity in this sector is unlikely. Source: NBR, INSSE, data processed by Coface

Thus, while 2011 recorded an average annual increase of productivity of 5% over the annual increase of real

salaries, the average level of this differential was -4% in the first quarter of this year.

Other risk factors on the inflation target are the uncertainties regarding the firm and consistentimplementation of fiscal consolidation measures and structural reforms in the context of the election year,

internal political pressures which lead to significant variations of the exchange rate of the RON compared tothe EUR.

Under these conditions, annual inflation may continue to increase in the second half of the year up to 4%-

4.5%, a dynamics which should not involve adverse effects or major concerns as long as it does not exceed5%.


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Macroeconomic Repor

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19

After three consecutive decreases operated by NBR on themonetary policy interest at the beginning of this year, its

level has remained unchanged since April 2012,

respectively 5.25%. Given the uncertainty and the high

local political tension, the aversion to risk on the external

financial markets and the inflation pressures from thesecond half of this year, it is very likely that the monetary

policy interests will remain unchanged until the end of thisyear.

It is noteworthy that the repo transactions supported by

NBR in the first half of this year amounted to values

which were much higher than those of last year, and thetotal value of the amounts adjudicated in the first 7 months

of this year was five times higher than the entire value of

the amounts adjudicated in 2011. Since August, for the firsttime since November 2008, NBR announced three consecutive

limitations of the volumes adjudicated by repo

transactions. This measure may cause the increase of

interests and may affect budget deficit, by the decrease ofthe demand for state bonds.



The 2nd quarter of this year recorded a decrease of domestic and external demand for state bonds, which

caused a slight increase of interests for all maturities. While on short-term the Ministry of Finances hasreasonable liquidity reserves accumulated in the 1st quarter for covering the public debt service and

financing the budget deficit, in the second half of this year the issuance of bonds must be more consistent.

Given that internal supply may prove insufficient for covering the financing necessities, the Ministry ofFinances will be forced to use financing transactions on external markets, a challenge in itself given the

aversion to risk of foreign investors.



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Macroeconomic Repor

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20

Financial intermediation

The local banking system continues to be affected in 2012

by a high level of bad loans. Moreover, the banks from theEU area, weakened because of the sovereign debt crisis,

own 72% of Romanian bank assets. In the following

period, they could be forced to limit their exposure on themarkets of Central Europe. Given an insufficient internal

savings rate, the local branches of European banks will

have in 2012 a high dependence on loans from their parentbanks.


The aforementioned context corroborated with the new

more restrictive foreign-currency crediting systemimposed by NBR starting with February 2012, causes the

financing support granted by the banking system to be

precarious. Evolution of the most important indicatorsregarding the structure and evolution of credit demand:

Bad credit rates (delays over 1 day) on the level ofthe entire banking system at the end of the 1st half

of this year was 12.32% for loans in the local

currency and 10.19% for loans in foreign

currencies. Source: NBR, data processed by Coface

The outstanding amounts recorded at the end of the first semester of this year for the entire bankingsystem were 25.1 billion RON, 30% more than the balance recorded in the same period of last year.

In the same analyzed period, outstanding amounts in foreign currencies increased 39% faster

compared to those in the local currency, which increased by 18%.

Considering as an estimator the CRB queries made by credit institutions for potential customers, thecredit demand decreased in the first year-half of this year compared to the same period last year.


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Macroeconomic Repor

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According to the reports issued by CRB in January-June 2012, there were approximately 945,000

queries for own and potential debtors, out of which 523,000 queries were exclusively for potentialdebtors.

The gap between the balance of credits in foreign currencies and in lei recorded an increase of 13% atthe end of the 1st year-half compared to the same period of last year, on the background of lower

interests for the credits in foreign currencies and less restrictive crediting conditions. Thus, the weight

of the credits in foreign currencies from the total balance of the credits granted by credit institutionsreached 64%.

The balance of the deposits obtained by the banking system in June 2012 increased by 3% comparedto the same period of last year, and natural persons recorded a double increase (12%) compared tolegal entities (6%). However, for the same analyzed period, the balance of the credits granted to

natural persons increased by only 3.4% compared to the one recorded by companies, which recorded

an increase of 8.92%.

Thus, on the background of a more significant increase of the balance of the deposits obtained by thebanking system compared to that of granted credits, the Deposit/Credit ratio marginally increased in

the 1st half of this year, and reached 1.4% at the end of June 2012.

NB

This presentation exclusively contains the intellectual property of the author on the date of this document and according to the

information available on this date. The document used various/numerous sources considered serious and reliable. Nevertheless, the

author does not guarantee in any way that the information contained in this material is adequate, accurate and complete.

The presentation and data analysis are provided in good faith and only for informational purposes. As a completion to this

material, other information will be collected in other ways by the reader. The author accepts no liability for the losses incurred

from the usage or relying on the data used in this presentation.

The reader is not authorized to extract or reproduce this material and the implicitly contained analysis for personal and internal

use, unless he or she clearly specifies the author. Also, the written consent of the author is required in order to make any public

statements or for any commercial purpose.

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Coface - Macroeconomic Report HI 2012

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