Author Topic: Romania: Improving track record, looking for consistency and growth  (Read 5922 times)

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Offline Laur

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Please find below our thoughts on Romania following meetings there on 7 November. The country’s progress in reducing the budget deficit below 3% of GDP in 2012 from around 9% only four years ago is impressive. This year’s consolidation came amid an election year and ensures further support from the IMF, with a third loan agreement expected in 1Q13 (a second precautionary one or even a Precautionary Liquidity Line). That said, structural reforms in the public sector and privatisation plans are behind schedule, hampering growth prospects. The country remains vulnerable to sudden fund outflows and weak export demand, hence the central bank is expected to focus more on the currency, rather than interest rates. Interest rate volatility affects the banking system and RON debt issuance. Inclusion in local currency government indices could boost portfolio inflows in 2013, the Treasury aiming to extend the average maturity of marketable debt and increase liquidity. Romania’s low public debt (below 40% of GDP) allows the MinFin to pay higher yields in exchange for longer maturities. At the same time, Romania could take advantage of the very good appetite for CEE assets on international markets and issue more EUR and USD bonds, despite a relatively modest issuance target of EUR 2.25bn in 2013. A consistent issuance program is also needed.

Romania‘s budget deficit will fall in 2012 below 3% of GDP (based on accruals, ESA 95 methodology) and the country will exit the Excessive Deficit Procedure (EDP). On cash basis, the deficit has been flat at 1.2% of GDP between July and October but local authorities have accumulated arrears following local elections in June. Looking at the structure of expenditure, the public wage bill will amount to 6.7-6.8% of GDP in 2012 (below the 7% target), while pensions and social transfers will be capped at 11% of GDP after pensions were frozen and social programs were streamlined. Public investment was 6.4% of GDP between January and October 2012 (vs. 6.5% in 2011).

Further fiscal consolidation in 2013 will necessitate additional reforms in order to meet the deficit target of 2.2% of GDP (too tight a target given the current economic weakness throughout Europe). The Romanian authorities intend to implement a list of reforms with help from the IMF and the World Bank (WB): improving tax collection, simplifying tax payment procedures, better monitoring the tax duties of wealthy individuals, prioritising capital expenditure though multi-annual investment plans and further reducing the losses of state-owned enterprises (SOEs). The first and last two items on the list have been permanently on the priority list of Romanian governments, with limited results.  There are a number of risks to next year's budget.  GDP growth could fall short of the government's 2% assumption while the wage bill will rise to 7-7.1% of GDP as wages are returned to June 2010 levels. EU fund disbursements will suffer financial corrections from EC as Romania failed to comply with the rules – this could amount to 0.5-0.6% of GDP.  Lastly there is likely to be pressure from local administration for higher expenditure.  Even if Romania fails to meet the 2.2% deficit target, a deficit below 3% of GDP in 2013 will be a positive result. The structural deficit could fall next year below 1% of GDP, approaching the 0.7% medium-term target

Romania has progressed much less in selling minority stakes in energy and transportation public companies and implementing professional management at other SOEs. Among Romanian politicians, the appetite for privatisations has fallen over the past few years. Recent events underline this trend: the failed privatisations of Oltchim (a large, loss-making chemical producer) and CupruMin (copper mine), the decision to postpone both the public offering of a 15% share in Transgaz (the natural gas grid operator) and the privatisation of the freight railway company CFR Marfa, the cancelled search for professional management at the National Road Company CNADR. These missteps occurred during the tenure of all three governments that led Romania in 2012. The IMF will push for more reforms before the current agreement expires in March 2013 by leaving discussions for a third agreement as late as possible, though there is a wide consensus among Romanian politicians in favour of a new precautionary loan agreement.

Romania’s biggest problem remains sluggish economic growth, but most countries in the region face the same challenge. This year’s forecasts have been downgraded to less than 1%, while the consensus among public institutions is that GDP growth will accelerate above 2% next year, although the outlook has worsen markedly in 2H12. Poor foreign demand has hit exports, while domestic demand is expected to contract in 2H12 because of dismal crops (-47% yoy for maize, -15% yoy for wheat) and a sharp fall in public investment. Public capital expenditure was curtailed in 2H12 following a larger public wage bill since June and the poor absorption of structural and cohesion EU funds (EUR 0.7bn in 1H12, EUR 01.bn in 3Q12). The economy lacks investment, FDI falling below EUR 2bn in 2012. At the same time, Romania managed to absorb just EUR 0.8bn in EU funds (EUR 1.7bn including agriculture funds) versus an original target for the year of EUR 6bn. We see 2013 growth at 1.3%, with downside risks, one of the most important being the failure to increase the absorption of EU funds significantly above EUR 2bn per year.   

The currency remains under pressure from capital flows. According to Romanian institutions and the IMF, the current account deficit will fall in 2012 to 3.6-3.7% of GDP and will stay close to 4% of GDP in 2013. Inelastic imports of energy and food, coupled with a high content of imports for Romanian exports explain why Romania failed to narrow the trade gap below EUR 10bn (7.7% of GDP). Romanian authorities are confident that FDI and structural and cohesion funds will be able to cover more than three quarters of the C/A gap, while portfolio investment could finance the rest. We argue that the latter needs a more predictable and stable political and economic environment. Political quarrelling during the summer caused portfolio outflows of EUR 1.8bn, driving EURRON to all-time highs. That said, inclusion in local bond indices could bring more stable portfolio inflows, although Romania’s share is likely to be small due to low liquidity and short maturities for eligible bonds. In addition, Romania will have to repay to the IMF approximately EUR 5.1bn in 2013 and EUR 4.7bn in 2014, so a depletion of FX reserves is expected, limiting the power of the central bank to intervene in the FX market. All of the above suggests that RON will remain under gradual depreciation pressure.   

The monetary policy will probably focus on the exchange rate, rather than interest rates. The National Bank of Romania (NBR) has been on hold since February 2012. Although inflation accelerated to 5.3% in September and will miss the 3% target this year, the central bank is unlikely to hike in 2013. The inflationary shock is caused by a temporary spike in food prices and the central bank believes it should not squeeze other categories of prices with tighter monetary policy as long as poor agricultural productivity and competition in the retail sector have to be tackled through structural reforms. Moreover, the central bank sees inflation returning to the target interval by the end of next year and fears moving against the easing trend in CEE. With limited scope for direct interventions, the NBR has used the supply of liquidity in order to fight depreciation. Since 8 October, one-week repos have been capped at a third of demand, helping the RON appreciate 1.4%. The central bank believes it has room to limit repos in the future, since the banking system holds a structural liquidity surplus. At the same time, the NBR admits that the surplus is held by just five banks, an underdeveloped money market and a lack of financing lines between local banks impeding the flow of liquidity towards banks with funding needs. Capping liquidity can’t be a sustainable policy since it will drive market interest rates up and deposits from non-banking clients cover 92% of bank financing.

The MinFin has had its best year on international markets, selling EUR 2.25bn and USD 2.25bn of debt, though its recent preference for EUR over USD can be questioned in term of pricing and maturity. Going forward, the MinFin will focus on local issuance, extending maturities and increasing liquidity to benchmark size for more bonds. The inclusion in the Barclays local bond index from 31 March 2013 should bring more liquidity from foreign investors. The Treasury declared that JP Morgan has shortlisted three RON bonds for inclusion in the local bond index, Romanian authorities believing that Romania could be part of the index as soon as 1Q13. Foreign investors owned just 6% of RON marketable debt at the end of August, while the share for FX debt issued locally was 25%. Meanwhile, the MinFin will try to extend the average maturity of RON issuance above 2Y from 1.6Y at the beginning of 2012 and 1.7-1.8Y currently. In terms of eurobond issuance next year, the MinFin plans to issue the equivalent of EUR 2.25bn in 2013. The Treasury admits that there is demand for 7-10Y debt in EUR and for 10-30Y debt in USD.

The banking system remains in the red, with the NBR expecting a slow recovery. EUR lending has been capped through a series of regulations aimed at reducing FX risk for unhedged borrowers, while RON lending remains expensive due to the high cost of funds and increasing NPLs (17.3% in September, with further increases expected). The central bank worries more about the upward trend of NPLs than about their volume, since total loans amount to just 40% of GDP in Romania  while the banking sector has a solvency ratio of 14.7%. Slow deleveraging continues with the foreign liabilities of the banking system declining by EUR 1.5bn between September 2011 and September 2012. The real growth rate of lending turned negative during the autumn, with demand declining as economic prospects worsened.

The biggest risk to our outlook on Romania remains the political noise, which has less to do with abandoning the IMF agreement (we see small chances of this happening) and more with possible tax changes or coalition reshuffling. The current ruling coalition, the Social Liberal Union (USL) has made it clear that they would like to replace the 16% flat revenue tax with a progressive tax system. Promises of higher social security, pension and wage spending could be fulfilled by raising the tax rate for better-off workers in order to meet the tight deficit target. In our opinion, the decision to reduce the disposable income for high earners could prove very costly for growth, hitting consumption, competitiveness (through higher labour costs in the best performing economic branches) and the quality of the loan portfolio (high earners are more indebted) at the same time.  If coalition members don’t reach an agreement on tax rates, the ruling coalition could change. Again, we don’t see any threat to denouncing the IMF agreement, but prolonged noise could keep investors away from Romanian assets.

Sursa: Unicredit



Offline Laur

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Re: Romania: Improving track record, looking for consistency and growth
« Reply #1 on: 2012 November, 12, 16:20:11 »
pe scurt, desi pare ca lucrurile merg mai binisor si par a se imbunatati si in viitorul apropiat, exita un risc mare de devalorizare a leului la anu datorita riscului politic in urma alegerilor de-acum, a diminurii rezervelor valutare ale BNR, ca urmare a rambursarilor imprumuturilor de la IMF si a incapacitatii de a atrage fonduri europene..



Offline Vadim

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Re: Romania: Improving track record, looking for consistency and growth
« Reply #2 on: 2012 November, 12, 17:22:06 »
pe scurt, desi pare ca lucrurile merg mai binisor si par a se imbunatati si in viitorul apropiat, exita un risc mare de devalorizare a leului la anu datorita riscului politic in urma alegerilor de-acum, a diminurii rezervelor valutare ale BNR, ca urmare a rambursarilor imprumuturilor de la IMF si a incapacitatii de a atrage fonduri europene..

Frate eu anul asta am vazut o crestere foarte mare in interesul in Shared Service Centre-uri in Romania, nu doar ca urmare a faptului ca din ce in ce mai multe multi-nationale realizeaza nevoia de "labour/knowledge arbitrage", dar si specific pentru ca Romania incepe sa convinga ca optiune si sa se maturizeze piata serviciilor (asta e quote aproape direct de la o firma interesata), si nu vad decat o posibila crestere a trend-ului asta in 2013, mai ales ca la polonezi si unguri (care au vazut devreme oportunitatea) s-a cam umplut piata la capitolul asta si au inceput sa devina PREA scumpa relocarea serviciilor acolo (nu degeaba zic multi analisti ca dupa ei ar trebui sa ne luam), chiar daca ungurii au bulit-o la un moment dat cu taxele de-au plecat multi de la ei, bulgarii/turcii/ucrainienii/whatever baltics n-au aceeasi "penetrare" a limbilor straine ca noi, iar la rusi nu prea se incumeta lumea - singura concurenta mai serioasa va fii Cehia pe 2013 zic eu.

Daca astia de la USL sunt baieti destepti vor sprijinii pe cat posibil cresterea serviciilor externe, si din surse sigur stiu ca in PSD sunt cativa care imping puternic chestia asta, mai ales ca va fii un boost politic gratuit in 2013 daca se concretizeaza deal-uri de-astea mari, desi e opozitie destul de mare contra ideii de "Special Economic Zones", cum au si polonezii, pentru a atrage investitiile



Offline Laur

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Re: Romania: Improving track record, looking for consistency and growth
« Reply #3 on: 2012 November, 12, 18:01:11 »
Mane, nu putem decat spera.. Dar daca o sa vina astia cu idei d-alea de impozite progresive si taxe marite, nu cred ca mai vine nici dreaq sa investeasca la noi  :fuga:




Offline Vadim

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Re: Romania: Improving track record, looking for consistency and growth
« Reply #4 on: 2012 November, 12, 21:30:07 »
Mane, nu putem decat spera.. Dar daca o sa vina astia cu idei d-alea de impozite progresive si taxe marite, nu cred ca mai vine nici dreaq sa investeasca la noi  :fuga:

de-acord, asta cu impozite progresive mi se pare oribila, oricine-ar propune-o - screw that shit ca si-asa dau mormane de bani la asigurarea de sanatate pe care n-o folosesc la nimic, ca am asigurare de top la regina maria cu 75EUR pe luna (sau cu 17 pe luna subventionat de angajator, cum am eu, si la care am bagat-o si pe maica-mea si a facut toate investigatiile posibile fara nici un ban) si prefer oricand clinicile private fata de ce-i la orice spital de stat (v-am povestit ce m-am speriat de elias cand trebuia sa-mi scot bila si la regina maria am avut conditii extraordinare si m-a costat doar 2500 RON, ca-s abonat - si daca eram pe abonamentul cel mai scump, ala de dupa al meu, care-ar fi mult mai ieftin decat ce dau la stat oricum, chiar si nesubventionat de firma, nu m-ar fi costat nimic operatia)



Offline ktistai

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Re: Romania: Improving track record, looking for consistency and growth
« Reply #5 on: 2013 September, 03, 13:27:43 »
any news?

Never explain. Friends do not need. Enemies will not believe you anyway  / The definition of insanity is doing the same thing over and over again and expecting different results / Adevarul invinge intotdeauna. In 3 cazuri din 7