NATIONAL BANK OF ROMANIA 1 - OeNBfe18c491-6378-46fc-9c7... · NATIONAL BANK OF ROMANIA 13 Inflation...

NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 1



Summary• Eurozone performance (esp. since 2007)

as political economy reason for current spurring of interest in firmer plans for euro adoption among NMS

• Timing of euro adoption, challenges and constraints in sequencing choices

• Currency substitution (especially foreign-exchange lending) as important element of concern in policymaking (monetary policy, financial stability)


Timing of Euro Adoption: Initial ConsiderationsTiming of Euro Adoption: Initial Considerations

Euro adoption as final stage of a complex convergence process, and not an initial condition of kick-starting such a process

OCA reasons: more catching-up necessary in per capita GDP; business cycle synchronization (low for Romania before 2008);

Need for diversified macroeconomic and structural policy toolbox in order to effectively manage disequilibria throughout pre-euro adoption period (w. monetary & exchange rate flexibility providing important degrees of freedom)

Importance of sustainability in evaluation of how criteria are met

No change expected in definition of convergence criteria

Sustainability considerations will necessarily involve assessments with implications on real convergence and, perhaps, also financial stability

Unilateral euro adoption not feasible and not a solution


‘Early’ Euro Adoption?Pros

More rapid expected reduction in transaction costs, exchange rate risk

Improved time consistency of macroeconomic policy mix (esp. avoidance of fiscal, wage policy relaxation)

Better incentives for timely implementation of structural reforms

Cons Low business cycle

synchronization leaves economy prone to asymmetric shocks

Loss of monetary/exchange rate flexibility leads to possibly significant macro adjustment being borne by output/employment

Significant disparities in real convergence indicators make catching-up process difficult to manage sustainably (ex. magnitude of B-S effects raising equilibrium inflation rates)

Difficulty of ex ante pinpointing (unmodified) central parity while equilibrium exchange rate may undergo substantial shifts


‘Late’ Euro Adoption?Pros

More progress in achieving nominal and real convergence

Longer time span available for tackling necessary structural adjustments

Further business cycle synchronization

Preserving monetary policy autonomy for longer

Cons Persistence of higher transaction

costs limits further financial, trade integration

Higher incentives for fiscal relaxation, delayed implementation of structural reforms

Delayed euro adoption sends unclear message to investors (domestic structural weaknesses or deliberate decision?)

As corollary of above, limits on exchange rate variations against background of full capital mobility may lead to periods of pronounced volatility in financial flows


RomaniaRomania’’s Timetable for Euro Adoption (I)s Timetable for Euro Adoption (I)

Timing of ERM2 entry is planned for 2012 in order to: provide some monetary and exchange rate flexibility (for a limited

time period) in order to further necessary and substantial structural adjustment

maintain motivation to carry out reforms in a timely manner and consolidate macro discipline (need for significant fiscal consolidation in 2010 – 2012)

provide the possibility of setting the central parity based on a more accurate estimate of the equilibrium exchange rate after overcoming both the peak in capital inflows (which remained higheven subsequent to EU accession), as well as the substantial andabrupt reduction in flows to EM after the onset of the global financial crisis

meet ex ante most of the convergence criteria and establish sustainability


RomaniaRomania’’s Timetable for Euro Adoption (II)s Timetable for Euro Adoption (II)

Timing configured to ensure ex ante likelihood of shorter necessary stay in ERM2 (min. 2 years), considering: credibility provided by final stage of the process (adoption of the euro)

and attendant spurring of adjustment possible volatile capital movements amid restricted exchange rate flexibility

during interim period the inflation targeting framework, to which exchange rate movements should be

clearly subordinated

a choice of time frame providing a balance between ambition and feasibility should serve to both anchor inflation expectations and increase the underpinnings for time consistency in macroeconomic policy

Eurozone entry is planned for January 1, 2015 (euro adoption decision expected in 2014)


Limiting the Speed of Growthof Foreign-Exchange Lending

• Successful euro adoption predicated on strong domestic currency in run-up• Existence of currency substitution not problem per se in savings, but in

challenges to macroeconomic management & financial stability posed by proliferation of lending in foreign exchange

– Reasons: lower interest rates; incomplete domestic markets, shorter yield curves• NBR early on defined flexible implementation of IT as focused on

ensuring compliance with sustainable progress of disinflation along medium-term path described by announced annual inflation targets, while remaining mindful of not exacerbating existing macroeconomic vulnerabilities or creating financial stability problems whose effects might compromise durability of secured disinflation gains: ‘macroeconomic risk-management perspective’, with primacy of price stability considerations

• Also, continuous focus since 2004 on slowing down speed of growth of foreign-exchange credit (for macro as well as financial stability reasons, due to increasing asset-liability mismatches), using all available policy tools (reserve requirements, LTV, loan-to-income limits for households, exposure limits to unhedged borrowers, higher coefficients in stress tests for exposures to non-euro credit)


Economic Growth in Peer Countries

-20

-15

-10

-5

0

5

10

15

20

2005

2006

2007

2008

2009

Q1

2009

Q2

2005

2006

2007

2008

2009

Q1

2009

Q2

2005

2006

2007

2008

2009

Q1

2009

Q2

2005

2006

2007

2008

2009

Q1

2009

Q2

-20

-15

-10

-5

0

5

10

15

20

net exportsgross capital formation*final consumptionGDP (rhs)

annual percentage change

Source: Eurostat

Czech Rep. Poland RomaniaHungary

contribution to annual change, pp

* including statistical discrepancy


Headline Inflation and CORE Inflation

2

3

4

5

6

7

8

9

10

Dec

.05

Feb.

06

Apr.0

6

Jun.

06

Aug.

06

Oct

.06

Dec

.06

Feb.

07

Apr.0

7

Jun.

07

Aug.

07

Oct

.07

Dec

.07

Feb.

08

Apr.0

8

Jun.

08

Aug.

08

Oct

.08

Dec

.08

Feb.

09

Apr.0

9

Jun.

09

Aug.

09

Oct

.09


CPI (total)

CORE1 (CPI – administered prices)

CORE2 (CORE1 – volatile prices*)

adjusted CORE2**

Source: National Institute of Statistics, National Bank of Romania calculations

*) products with volatile prices: vegetables, fruit, eggs, fuels**) excluding tobacco and alcoholic beverages


Inflation Forecast

-1

0

1

2

3

4

5

6

7

8

9

10

I2009

II III IV I2010

II III IV I2011

II III

uncertainty interval

variation band*

4-quarter inflation rate

target


-1

0

1

2

3

4

5

6

7

8

9

10

I2009

II III IV I2010

II III IV I2011

II III

variation band*

target

4-quarter inflation rate


Inflation targets (Dec./Dec.) 2009: 3.5% 2010: 3.5% 2011: 3.0%

*) ±1 percentage point around the central targetSource: National Institute of Statistics, National Bank of Romania calculations


Inflation Rate and Interest Rates

0

48

1216

20

2428

32

Jan.

04M

ay.0

4Se

p.04

Jan.

05M

ay.0

5Se

p.05

Jan.

06M

ay.0

6Se

p.06

Jan.

07M

ay.0

7Se

p.07

Jan.

08M

ay.0

8Se

p.08

Jan.

09M

ay.0

9Se

p.09

Source: National Bank of Romania, National Institute of Statistics

percent

inflation rate (percentage change against the same year-earlier period)

interest rate on monetary policy operations(stock; % p.a.)

NBR policy rate (% p.a.)

04

812

1620

2428

32

Jan.

04M

ay.0

4Se

p.04

Jan.

05M

ay.0

5Se

p.05

Jan.

06M

ay.0

6Se

p.06

Jan.

07M

ay.0

7Se

p.07

Jan.

08M

ay.0

8Se

p.08

Jan.

09M

ay.0

9Se

p.09

percent

inflation rate (percentage change against the same year-earlier period)

average interest rate on lei-denominated loans to non-financial corporations and households (% p.a.)

average interest rate on lei-denominated time deposits fromnon-financial corporations and households (% p.a.)

NBR policy rate: 8.0% starting with September 30, 2009


-3.7

-5.5

-3.3

-5.8

-8.4 -8.6

-10.4

-13.5-12.3

-4.6 -4.8

2000 2001 2002 2003* 2004* 2005* 2006* 2007* 2008* 2009f* 2010f*

Current Account Balance

percent of GDP

*) including reinvested earningsSource: National Bank of Romania, National Institute of Statistics, National Commission of Prognosis

f) forecast

Jan.-Sept. 2009: EUR 3.3 bn., down 74.6% yoy


Current Account Deficit Financing via FDI

-16.7(13.5% GDP)

-16.9 (12.3% GDP)

7.0(5.7% GDP)

9.3 (6.8% GDP)

0.7(0.6% GDP)

0.6(0.4% GDP)

-25

-20

-15

-10

-5

0

5

10

2007 2008

capital transfersforeign direct investmentcurrent account balance

EUR bn.

Current account financing via FDI (including capital transfers) amounted to 58.4% in 2008 vs 46.5% in 2007. In 2008, net FDI increased 31.6% yoy.Source: National Bank of Romania, National Institute of Statistics

-13.0

-3.3

6.93.5

0.4

0.2

-15

-10

-5

0

5

10

Jan.-Sept. 2008 Jan.-Sept. 2009

capital transfers

foreign direct investment

current account balance

Current account financing via FDI (including capital transfers) amounted to 112.6% in Jan.-Sept. 2009 vs 55.7% in Jan.-Sept. 2008. In Jan.-Sept. 2009, net FDI decreased 49.4% yoy.

EUR bn.


Nominal Exchange Rate

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

Jan.

02

May

.02

Sep.

02

Jan.

03

May

.03

Sep.

03

Jan.

04

May

.04

Sep.

04

Jan.

05

May

.05

Sep.

05

Jan.

06

May

.06

Sep.

06

Jan.

07

May

.07

Sep.

07

Jan.

08

May

.08

Sep.

08

Jan.

09

May

.09

Sep.

09

Source: National Bank of Romania

RON/EUR (daily data)

NBR's decision to pursue a more flexible exchange rate


Real Exchange Rate of the RON against the EUR

80

100

120

140

160

180

200

220

240

260Ja

n.01

May

.01

Sep.

01Ja

n.02

May

.02

Sep.

02Ja

n.03

May

.03

Sep.

03Ja

n.04

May

.04

Sep.

04Ja

n.05

May

.05

Sep.

05Ja

n.06

May

.06

Sep.

06Ja

n.07

May

.07

Sep.

07Ja

n.08

May

.08

Sep.

08Ja

n.09

May

.09

Sep.

09

index, 2000 = 100, monthly averages

based on CPI differential between Romania and Euro area

based on PPI differential between Romania and Euro area

based on ULC in industry

Source: National Bank of Romania calculations, National Institute of Statistics, IMF - International Financial Statistics

Note: For PPI and ULC, data recalculated according to NACE Rev.2 and to the change in the base year (2005 instead of 2000) and weighting system.


100

105

110

115

120

2005 2006 2007 2008 2009*

Source: National Institute of Statistics, National Bank of Romania calculations

previous year =100

labour productivity gross real wage (based on PPI)

Real Wage and Labour Productivity in Industry

*) Jan.-Aug.

Note: Data recalculated according to NACE Rev.2 and to the change in the base year (2005 instead of 2000) and weighting system.


Source: National Bank of Romania

MLT External Debt

0.2 0.4 0.9 1.0 3.2 5.5

7.2

5.6 6.0 7.912.4

17.0

25.3

35.2

37.3

9.2 9.710.0

11.310.7

10.2

10.7

12.8

6.60.2 0

5101520253035404550556065707580

2002

2003

2004

2005

2006

2007

2008

2009

*

public and publicly guaranteed debt private debt deposits of non-residentsIMF loans

EUR billionTotal External Debt

15.0 15.9 18.324.6 28.6

38.7

51.4

62.9

1.2 2.03.2

6.3

12.5

19.8

20.6

15.3

05

101520253035404550556065707580

2002

2003

2004

2005

2006

2007

2008

2009

*

ST debt(majority private debt)

MLT debt

EUR billion

*) September


Public Debt

15.7 16.1

6.99.9

5.8

15.411.1 9.8 8.7 7.8

16.213.5

6.1

4.72.6 4.0

8.8

5.3

21.022.6

26.025.0

21.5

15.8

12.4 12.7 13.6

18.8

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f

Source: Ministry of Public Finance, National Bank of Romania, National Institute of Statistics

domestic public debt/GDP

foreign public debt/GDP

percent of GDP (according to ESA 95 methodology)

f) EDP Notification, October 2009

Note: Government securities in MFIs portfolio as share of GDP in Dec.07=1.7%, Dec.08=2.2% and Aug.09=7%


-4.4

-3.5

-2.0-1.5

-1.2 -1.2

-2.2-2.6

-5.5

-7.9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f

Source: Ministry of Public Finance, National Institute of Statistics, National Commission of Prognosis

General Government Deficit

percent of GDP(according to ESA 95 methodology)

f) EDP Notification, October 2009


0

200

400

600

800

1,000

1,200Ja

n.08

Feb.

08

Mar

.08

Apr.0

8

May

.08

Jun.

08

Jul.0

8

Aug.

08

Sep.

08

Oct

.08

Nov

.08

Dec

.08

Jan.

09

Feb.

09

Mar

.09

Apr.0

9

May

.09

Jun.

09

Jul.0

9

Aug.

09

Sep.

09

Oct

.09

Nov

.09

Romania (BB+) Czech Rep. (A)

Bulgaria (BBB-) Hungary (BBB)

Latvia (BB+) Poland (A-)

Lithuania (BBB)

Source: Bloomberg

Eurobond Spreadsbasis points

Note: The spread is calculated as against the yields on German Bunds maturing in 2012 Bond maturity: 2011 for Hungary; 2012 for Poland, Romania and Lithuania; 2013 for Bulgaria; ' ' 2014 for Czech Republic and Latvia () Composite rating (Moody's, S&P, Fitch)


0

200

400

600

800

1,000

1,200

1,400

Jan.

08

Feb.

08

Mar

.08

Apr.0

8

May

.08

Jun.

08

Jul.0

8

Aug.

08

Sep.

08

Oct

.08

Nov

.08

Dec

.08

Jan.

09

Feb.

09

Mar

.09

Apr.0

9

May

.09

Jun.

09

Jul.0

9

Aug.

09

Sep.

09

Oct

.09

Nov

.09

Latvia Czech Rep. Lithuania Poland

Hungary Bulgaria Romania

Spreads of Five-year CDS for Emerging Economiesin Central and Eastern Europe

Source: Bloomberg

basis points


Debtors

15.214.612.7

21.1

25.326.8

19.9

22.724.623.4

0

5

10

15

20

25

30

35

40

45

2007Q1

Q2 Q3 Q4 2008Q1

Q2 Q3 Q4 2009Q1

Q2

loans to households

loans to non-financial corporations a.o.

percentCurrency

23.4 24.622.7

19.9

25.3

21.1

12.714.6 15.2

26.8

0

5

10

15

20

25

30

35

40

45

2007Q1

Q2 Q3 Q4 2008Q1

Q2 Q3 Q4 2009Q1

Q2

foreign-exchange-denominated loans

lei-denominated loans

percent

*) percent in quarterly GDP

Financial Intermediation*- Flows -

Source: National Institute of Statistics, National Bank of Romania


Loans to the Private Sector


-20

0

20

40

60

80

100

120

140

Dec

.05

Mar

.06

Jun.

06Se

p.06

Dec

.06

Mar

.07

Jun.

07Se

p.07

Dec

.07

Mar

.08

Jun.

08Se

p.08

Dec

.08

Mar

.09

Jun.

09Se

p.09

lei-denominated loanstotalforeign-exchange-denominated loans

-20

0

20

40

60

80

100

120

140

Dec

.05

Mar

.06

Jun.

06Se

p.06

Dec

.06

Mar

.07

Jun.

07Se

p.07

Dec

.07

Mar

.08

Jun.

08Se

p.08

Dec

.08

Mar

.09

Jun.

09Se

p.09

households

total

non-financial corporations & financialcorporations other than MFIs

real annual percentage change*

*) based on CPI

real annual percentage change*


Private Sector Deposits


(in real terms)

lei-denominated deposits

0 10 20 30 40 50 60 70 80 90

100 110

Dec

.05

Mar

.06

Jun.

06Se

p.06

Dec

.06

Mar

.07

Jun.

07Se

p.07

Dec

.07

Mar

.08

Jun.

08Se

p.08

Dec

.08

Mar

.09

Jun.

09Se

p.09

lei billion

corporations*households

(def

late

d by

CPI

,Sep

. 200

9=10

0)

0 10 20 30 40 50 60 70 80 90 100 110

Dec

.05

Mar

.06

Jun.

06Se

p.06

Dec

.06

Mar

.07

Jun.

07Se

p.07

Dec

.07

Mar

.08

Jun.

08Se

p.08

Dec

.08

Mar

.09

Jun.

09Se

p.09

lei billion

corporations*

households

foreign-exchange-denominated deposits

*) non-financial corporations and financial corporations other than MFIs

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