NATIONAL BANK OF ROMANIA
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From financial turmoil to financial crisis ¾ What began as a turmoil with the bursting of the US housing bubble and the first sub-prime credit induced losses in the summer of 2007 turned into a full-fledged crisis once Lehman Brothers went bankrupt in September 2008 ¾ Major changes in investors’ behaviour occurred – amid increased risk aversion there has been a shift from global excess liquidity to liquidity crunch ¾ There are both direct and indirect effects of the crisis: 9 Direct effects from banks’ exposure to “toxic assets” 9 Indirect effects caused by changes in the availability of capital and liquidity conditions Ö less external financing NATIONAL BANK OF ROMANIA
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Romania – Overview of the Global Financial Crisis Effects
NATIONAL BANK OF ROMANIA
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No direct effects… The banking system is fundamentally sound ¾ Lack of exposure to “toxic assets” which lie at the root of the crisis ¾ Traditional banking products dominant due to their high profitability ¾ Prevalence of the “originate and hold” paradigm NATIONAL BANK OF ROMANIA
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…yet the indirect effects are significant ¾ Availability and cost constraints of external financing 9 Major impact on the availability of foreign-exchange denominated credit
¾ Decline in the volume of FDI inflows ¾ Increased likelihood of profit repatriation, in the context of an ongoing process of international deleveraging ¾ Negative impact on foreign demand, affecting Romania’s exports ¾ Increased exchange-rate volatility amid the significant decrease in investors’ appetite for risk on emerging markets NATIONAL BANK OF ROMANIA
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However, there are some alleviating factors… ¾ NBR’s prudent policies provided a cushion for the banking system: 9 High level of reserve requirements allows for the gradual adjustment of banking system liquidity, depending on the evolution of market conditions
9 Prudential and administrative measures slowed down the expansion of credit to the private sector supported lending in domestic currency to the detriment of forex credit limited overall risk exposure
¾ Low share of overdue and doubtful loans in total loan portfolio (1.1 percent as of September 2008) ¾ Confidence boosting measures: 9 Starting 15 October 2008, the guaranteed level for bank deposits (per individual and per credit institution) is EUR 50,000 from EUR 20,000 previously
¾ Continental-type financial system, dominated by banks 9 Moderate impact of declining stock prices on corporate financing NATIONAL BANK OF ROMANIA
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Analysis Ratios for the Banking System 3.5
percent
percent
35
overdue and doubtful loans of non-bank clients/total loan portfolio solvency ratio* (>8%); rhs
3.0
30
ROE (net income / total equity); rhs 2.5
25
21.1
20.6
19.4
18.1
2.0
16.5 15.6
1.5
12.7
1.0 0.7
15.8
13.8 10.2
0.5
20
0.5
0.4
11.9 9.4
0.8
13.0
12.8
0.8
1.0
15 10
1.1
5 0
Sep.08
Jun.08
Mar.08
Dec.07
Dec.06
Dec.05
Dec.04
0.0
* Starting with 2007, according to Regulation No.13/2006 and Order No.12/2007; (>12%) until end-2006.
Source: National Bank of Romania
NATIONAL BANK OF ROMANIA
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Romania – Macroeconomic Consequences of the Crisis
NATIONAL BANK OF ROMANIA
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Wide external imbalances are no longer acceptable ¾ High economic growth in recent years and even disinflation have come at the price of an ever larger current account deficit 9 There is a tight relationship between the fast expansion of domestic absorption, fuelled by rapidly growing personal incomes and credit, and the widening of the external gap
¾ The crisis will have an ambivalent impact on the magnitude of the current account deficit 9 Exports will decelerate following the trend in external demand 9 Imports will also decelerate, as a consequence of the decline in investment activity and exports
¾ The likely decrease in the FDI flow will make financing more expensive and significantly less available 9 However, higher deposit rates should stimulate saving and would, therefore, reduce the gap between saving and investment
¾ There are mitigating factors with regard to the availability of financing resources: 9 Alternative financing sources credit lines from international financial institutions such as EIB, EBRD, World Bank, etc. better absorption of EU structural funds
9 Credit lines from parent banks to their local subsidiaries will not be discontinued a decrease in their generosity is however likely
NATIONAL BANK OF ROMANIA
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Inflation Rate and Current Account Balance
Real GDP annual percentage change
percent
17.8 8.5
5.1
9.3
6.0
5.2
current account balance/GDP
14.1
8.0
7.9
inflation rate (Dec./Dec.) 8.6
4.2
6.6
6.7
4.9
-3.3 2002
2003
2004
2005
2006
2007
2008f
-5.8
-8.4
-8.7 -10.4
2008 Q1: 8.2%; 2008 Q2: 9.3%; 2008 Q3: 9.1%; 2008 Jan.-Sep.: 8.9%
Source: National Institute of Statistics, National Bank of Romania
-13.8
-13.0
2002 2003* 2004* 2005* 2006* 2007* 2008f* *) including reinvested earnings f) NBR preliminary estimate
NATIONAL BANK OF ROMANIA
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Domestic Demand and External Imbalance 16
real annual percentage change
% of GDP, cumulative value for the last four quarters
16.0
14
current account deficit (right-side scale)
14.0
12
domestic demand
12.0
10
GDP
10.0 8.0
6
6.0
4
4.0
2
2.0
0
0.0 2002 I II III IV 2003 I II III IV 2004 I II III IV 2005 I II III IV 2006 I II III IV 2007 I II III IV 2008 I II III
8
Source: National Institute of Statistics, National Bank of Romania calculations
NATIONAL BANK OF ROMANIA
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Correlation between Current Account Deficit and Credit Flow 16
percent, cumulative values for the last four quarters
percent
16
14
current account deficit/GDP
14
12
credit flow/GDP* (right-side scale)
12
III
II
2008 I
IV
III
II
2007 I
IV
III
II
2006 I
IV
III
II
2005 I
IV
0 III
0 II
2
2004 I
2
IV
4
III
4
II
6
2003 I
6
IV
8
III
8
II
10
2002 I
10
*) Credit flow represents the difference between Q stock and Q-4 stock. Source: National Institute of Statistics, National Bank of Romania
NATIONAL BANK OF ROMANIA
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Current Account Deficit Financing via FDI 10
EUR billion 2.2
EUR billion 0.7
0.4 0.3
5 6.5
7.0
5 7.2
5.7
0
-5
10
0
-10.2
-11.1
-12.7
-5
-16.7 -10
-15
-10
-0.03 capital transfers BCR privatization non-privatization FDI current account balance
capital transfers foreign direct investment current account balance
-20 2006
2007
Current account financing via FDI (including capital transfers) amounted to 46.4% in 2007 vs 85.6% in 2006. In 2007, net FDI decreased by 19% yoy.
-15
-20 Jan.- Sep. 2007
Jan.- Sep. 2008
Current account financing via FDI (including capital transfers) amounted to 59.4% in Jan.- Sep. 2008 vs 54.9% in Jan.-Sep. 2007. In Jan. - Sep. 2008, net FDI increased 25.5% yoy.
Source: National Bank of Romania
NATIONAL BANK OF ROMANIA
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Economic activity will decelerate, but inflationary pressures will persist… ¾ Contracting external demand and subdued investment render a slowdown in economic growth unavoidable 9 Economic growth is sure to decelerate in 2009, but it will remain in positive territory
¾ A rise in unemployment will follow 9 Hardly a critical macroeconomic issue, given the very low current level 9 The added slack in the labour market will prove useful in curbing excessive wage increase demands 9 A more flexible labour market would facilitate the absorption of the recently unemployed
¾ Inflationary pressures are not likely to subside next year 9 Excess demand will still be there, fuelled by the recent hikes in personal incomes NATIONAL BANK OF ROMANIA
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Unemployment and Unemployment Rate in Economy 1,400
percent
thousand unemployment in economy
unemployment rate (right-side scale)
1,200
14 12
Jul.08
Jan.04
Jan.08
0
Jul.07
0
Jan.07
2
Jul.06
200
Jan.06
4
Jul.05
400
Jan.05
6
Jul.04
600
Jul.03
8
Jan.03
800
Jul.02
10
Jan.02
1,000
Source: National Institute of Statistics
NATIONAL BANK OF ROMANIA
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…while the fiscal position is likely to deteriorate in the absence of corrective action ¾ Decelerating economic activity will affect revenue collection in the context of recently legislated permanent hikes in current expenditures ¾ In the absence of timely measures, there is a high risk of breaching the Stability and Growth Pact (SGP) 3 percent of GDP threshold in both 2008 and 2009
NATIONAL BANK OF ROMANIA
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General Government Deficit /GDP (adjusted to ESA 95 methodology)
percent
-1.5
-1.2
-1.2
-2.0
-2.2 -2.6 -3.4 -4.1
2002
2003
2004
2005
2006
2007
Source: Ministry of Economy and Finance, National Institute of Statistics, European Commission Autumn 2008 Economic Forecast
NATIONAL BANK OF ROMANIA
2008*
2009* *) forecast
17
Total External Debt
EUR billion
EUR billion
70 65
ST debt (majority private debt)
60
MLT debt
22.0
50
70
private debt
65 60
deposits of non-residents
55
55 50
20.2
45
10.6
40 35
12.5
30
48.1
2008*
2007
2006
2005
2004
2003
2002
0
9.2
9.7
5.6 0.2
6.0 0.2
7.9 0.4
Source: National Bank of Romania, Ministry of Economy and Finance
NATIONAL BANK OF ROMANIA
12.4
25 20 15 10
16.6
0.9
1.0
3.2
2007
18.3
25.0
10.0
2006
15.0 15.9
24.6
28.5
40 30
31.5
2005
5
2.0
2004
10
1.2
11.3
38.4
2003
15
3.2
2002
20
11.0
45 35
10.2
6.3
25
75
public and publicly guaranteed debt
6.0
2008*
75
MLT External Debt
5 0
*) September 18
What Needs to be Done?
NATIONAL BANK OF ROMANIA
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The current account deficit must be brought down through adequate policy measures ¾ There is no alternative to an adjustment of internal absorption able to significantly narrow the external imbalance 9 While Romania still enjoys significant economic growth there is room for a relatively smooth correction 9 A restrictive monetary policy alone cannot accomplish this task – only a comprehensive and coherent policy mix will do
¾ The adjustment burden must be borne by both private and public sectors ¾ Structural reforms are needed in order to: 9 Add more flexibility to the labour market 9 Boost productivity 9 Stimulate external competitiveness NATIONAL BANK OF ROMANIA
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A large budget deficit must be avoided ¾ Large deficits will be penalized by both the EC and financial markets: 9 Entry into Excessive Deficit Procedure, which may lead to: financial penalties restricted access to EU funds
9 More expensive or even rationed access to financing
¾ Fiscal policy should: 9 Avoid further expenditure expansion 9 Focus on public investment 9 Aim at increasing the efficiency of public spending 9 Be designed with a view to the medium to long-term consequences (multiannual budgeting) NATIONAL BANK OF ROMANIA
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In the absence of an adequate adjustment program … ¾ … a disorderly adjustment will occur and it will be neither smooth, nor reasonably sized ¾ … a massive drop in foreign capital inflows is likely to follow 9 Reduction in international reserves 9 Loss of international credibility
NATIONAL BANK OF ROMANIA
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Summing up ¾ An accurate macroeconomic diagnosis is required: 9 An emotional approach of the crisis may lead to inadequate measures giving rise to an unwarranted stimulus to domestic demand
¾ A coherent policy mix is essential for a smooth restoration of macroeconomic equilibria
NATIONAL BANK OF ROMANIA
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