Romania and the international financial and economic crisis

1
Romania and the international financial and
economic crisis
Ionut DUMITRU Chief-Economist Raiffeisen Bank
Romania
2
International crisis effects on Romania

• No direct effects of the subprime crisis on the
  Romanian economy
• Banks in Romania had no direct exposure to the
  subprime market in the US, while mother banks
  abroad had also only a very low exposure to
  toxic assets.
• Important indirect effects because Romania is
  highly dependent on the external funding (current
  account deficit stood at 12.3 of GDP in 2008).

External debt and the debt of banking sector (
of GDP, 2008 Q2)
Current account deficit ( of GDP, 2008 Q2)
Source Eurostat, National Bank of Romania,
Raiffeisen RESEARCH
3
Romania main challenges

• The crisis on the international markets and the
  large domestic macroeconomic disequilibria raise
  important challenges for the government and the
  central bank
• Challenges in short-term
• Securing external financing
• Securing stability of the financial system
• Dealing with the downturn in the economic
  activity
• Challenges in long-term
• Continuing the real and nominal convergence
  process in order to become a member of the Euro
  area
• Securing sustainability of the current account
  deficit

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Romania securing external financing (1)

• Romania was strongly affected by the increase in
  risk aversion due to large macroeconomic
  imbalances and inappropriate economic policies
  (i.e. proc-cyclical fiscal policy)
• SP and Fitch cut the countrys ratings to
  non-investment grade
• Availability of external funding decreased
  rapidly in the context of an ongoing process of
  international deleveraging
• Foreign banks reduced additional funding to their
  local subsidiaries
• FDIs inflows are likely to decrease in the next
  period
• Foreign investors might decide to repatriate
  their profits
• Cost of external funds increased sharply
• Pressures for leu depreciation

5-years CDS for CEE countries
Source Bloomberg, Raiffeisen RESEARCH
5
Romania securing external financing (2)

• Romania should ask for a multianual financial
  package from the European Commission, IMF and
  other international financial institutions (WB,
  EBRD, EIB).

6
Romania Securing stability of the financial
system

• Stability of the exchange rate is a vital issue
  for the economy
• The leu was on a depreciating trend in last
  months, but the move was in line with
  developments in the other regional currencies.

Regional exchange rates
Loans in foreign currencies ( of total)
Fixed base index, 29 December 2007100
Source Reuters, National Bank of Romania,
Raiffeisen RESEARCH
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Romania dealing with the downturn in the
economic activity (1)

• Romanian economy expanded by more than 6 per
  year between 2001-2007
• However, economic activity would decelerate
  rapidly in the next quarters (with important
  recession risk)
• Recession from Euro area puts downward pressures
  on exports
• Decrease in external funding limits capacity of
  banks to extend lending and of companies to
  invest ? sharp deceleration of consumption and
  investments

Average GDP growth rate in NMS (2001-2007 )
Worst performers in industry at the end of 2008
( yoy)
Real GDP growth ( yoy)
Source Eurostat, Raiffeisen RESEARCH
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Romania dealing with the downturn in the
economic activity (2)
The governments space of manoeuvre is limited

• The large budget deficit (around 5 of GDP) and
  the downward pressures on the public revenues
  limit the capacity of government to expand public
  spending in order to offset the slowdown in
  private aggregate demand
• Financing a large budget deficit is also
  difficult (and costly) due to the financing
  constraint both on the local market and on the
  external markets
• This explains the lack of a strong anti-crisis
  package for the economy
• At the moment, the government should concentrate
  more on the increase of public spending
  efficiency and on the increase of structural
  funds absorption

Consolidated budget deficit ( of GDP)
The central banks space of manoeuvre is also
limited

• Central bank remains focused on the exchange rate
  stability
• As a result, the stance of the monetary policy is
  likely to be eased only gradually.
• A more coherent macroeconomic policy mix (more
  restrictive Government policies) will reduce the
  monetary policy burden.

Source Finance Ministry, Raiffeisen RESEARCH
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Romania dealing with the downturn in the
economic activity (3)

• There are some mitigating factors which might
  help the economy to avoid a hard landing in the
  next period
• Relatively lower share of credit in GDP
• The banking system is fundamentally sound and
  profitable
• Lower dependency on exports
• Exchange rate flexibility
• Large EU structural funds available for Romania.

Non-government credit in 2007 ( of GDP)
Exports of goods and services in 2007 ( of GDP)
Source Eurostat, ECB, Raiffeisen RESEARCH
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Romania Appropriate measures required to
support the real convergence process

• Long-run economic growth potential is strong
  given that GDP per capita is very low
• The government should avoid to pursue
  pro-cyclical fiscal policies and it should
  concentrate on investment expenditures
  (especially infrastructure) an absorption of
  structural funds
• The pattern of GDP growth should change.
• A more appropriate policy mix is required.

GDP per capita at purchasing power parity in 2007
( of EU 27)
Note The dark blue lines denote the value of the
indicator in 2000
Source Eurostat, Raiffeisen RESEARCH