The financial deleveraging process had a neutral effect on the economy, as the demand for lending remained low. The deleveraging process will slow down this year, while the interest rates will keep floating around 3 percent. And while there’s a surplus of RON, lending in national currency will tend to grow. Meanwhile, the Standard & Poor’s recent decision to up our rating to investment grade will allow more cautious investors to invest in Romania, Mihai Pătrulescu, Senior Economist at UniCredit Tiriac Bank, tells Romania-Insider.com.
Analysts predict a recovery of trust in emerging economies and the rebuild of a growing appetite for risk and non-risk assets. What is the trend in Romania, especially after receiving the S&P investment grade rating? Should we expect to have large speculative positions on the RON and a growing appetite for our fixed income instruments?
We believe that Romania’s return to the investment grade category was justified for quite some time, while the perception of the country on international markets even before the S&P decision was positive. In this context, the short-term impact of S&P's decision was a small one: Romania’s credit default swaps (CDS) decreased by approximately 20 basis points and the currency appreciated slightly. We do not anticipate that the state will issue bonds on the international markets again during the year.
S&P’s decision will, however, have a long-term impact because it will allow more cautious investors to invest in Romania and will provide support in the event that the situation in Ukraine will deteriorate. The impact transfer of the S&P decision to companies and individuals could be accelerated by any new bond issuances of the Romanian banks.
What will be the effects of the conflict in Ukraine on the markets, including the local one? Which may be the effects on the Romanian leu and the economy in different scenarios?
In a scenario in which military conflicts will not escalate, which is our expectation, the impact on Romania could remain limited. Commercial ties between Romania and Russia and respectively Ukraine are small, the two countries accounting for only 4.7 percent of Romania's exports. Indeed, all gas imported from Romania comes almost exclusively from Russia, but the domestic production supplies 85 percent of the country's consumption needs. Thus, Romania could fill up its consumption needs until at least November – December, in the event that trade barriers will be imposed.
There aren’t any direct links between banks in Russia and those in Romania either, and the connections are relatively small in the industrial sector. There is also a risk of shock transfer through the financial channel, but these effects were small so far.
Lacking an excellent agricultural year (or starting already from the base of an excellent agricultural 2013), what are your estimates on Romania’s indicators in 2014?
The economic growth has surprised positively in Q1 of 2014 by an increase of 0.1 percent quarter-on-quarter. This increase is very encouraging considering the fact that agriculture had a strong positive contribution in Q4 of 2013.
We estimate that the GDP in Q1 2014 was supported by an accelerated dynamic in industrial production. However, we are reserved on extrapolating the current growth rates in the industrial sector for the rest of the year, as the 2013 evolution was accelerated by creation of new production capacities.
In this context, we anticipate a rotation of growth sources during the year. The contribution of industrial production will decrease, but this could be offset by a regain in domestic consumption and investments, which will benefit from EU funds absorption.
The fundamental position of the leu remains positive: capital inflows generated by European funds have accelerated, inflation remains at low levels, and financial deleveraging process showed signs of slowing down. The main risks pressing the exchange rate are generated by capital volatility in international markets.
There is a danger of deflation or is deflation "good"? Why did the central bank decrease so late the key interest?
Although the evolution of consumer prices in the first four months of the year was a favorable one, we believe that the risk of deflation for Romania remains very small. The annual inflation reached a historic low of 1.06 percent, on the background of lower import prices, but it has accelerated since April, with the introduction of additional excise duties on fuel.
We anticipate inflation to accelerate to 3.5 percent by the end of the year, thus remaining in the upper limit of the central bank's target range.
The central bank turned 180 degrees in terms of its policy on consumption, which is considered good now. Do you have any comments?
Romania registered a substantial adjustment of economic imbalances in the aftermath of the crisis: the current account deficit decreased from 13 percent of GDP in 2007 to 1 percent of the GDP in 2013 and the structural budget deficit decreased from 8 percent of GDP in 2008 to around 2 percent of GDP in 2013. Maintaining the economic discipline will be essential to ensure sustainable growth, but Romania could benefit at this time from a diversification of growth sources in the economy.
Do we still need the International Monetary Fund (IMF)?
The IMF agreement facilitated stabilizing the economy and implementing a series of structural reforms, with positive effects on long-term growth perspectives in Romania. The continuity of these structural reforms should be treated as a priority for the fiscal policy. Extending the agreement with the IMF can be used as an anchor for structural reforms and as an assurance of maintaining fiscal discipline in Romania.
How did the interest rates evolve? May there be a further decrease in the key interest rate?
The transfer of monetary policy decisions to the interests on the interbank market was efficient. The central bank began easing monetary conditions cycle in early 2013, the interest rates dropped from 5.25 percent to the current level of 3.5 percent. At the same time, interest on the interbank market experienced a steep deceleration, the Robor rate at 3 months dropping from 5.4 percent in March 2013 to 3 percent in April 2014.
Given the perspective of an accelerated inflation to 3.5 percent at the end of 2014, we believe the central bank will keep monetary policy rate unchanged during the year. In this context, liquidity management policies will have an increased importance in influencing interest the interest rates in the economy.
Is liquidity currently a problem in the market?
The banking system still records a surplus of lei, which helps maintain the interest rates under the central bank reference. However, variations in liquidity conditions may generate volatility for the interest rates. Ensuring a better predictability of liquidity conditions could reduce these risks.
Which is the reason behind parent banks’ decisions to withdraw funding lines to the East and it is good or bad to have lending primarily in lei?
The financial deleveraging in Romania was a gradual process and coincided with a period of a very low demand for loans. Thus, we estimate that deleveraging of the 2013-2014 period had a neutral effect on lending activity up to now. We anticipate that deleveraging process will slow starting this year.
Lending mostly in lei can have benefic effects on the economy as it eliminates the currency risk, and interest rates of the local market became more competitive compared to the euro ones. It remains to be seen if the local market can accommodate a strong demand for loans in lei.
How do you see the banking consolidation process by portfolio or bank takeovers and restructuring of organizations? How will the banking sector look in the coming years?
The consolidation of the banking system is a normal process after the exuberance of 2005-2008. The trend of customers restricting debt levels is obvious, and this has a direct effect on the structure of the banking system. Under these conditions, we anticipate shaping of stronger groups in the domestic banking system.
Which are the solutions to restart the economy in the medium term?
The main opportunity for the Romanian economy is absorbing European funds. Both 2014 and 2015 are years in which we can significantly accelerate the absorption of funds and improve the long-term growth prospects of the economy.
By Bogdan Tudorache, business writer