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February 2008

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Implementing a looser budget policy, specific to an election year ... worsening of the short-term inflation outlook ... the overappreciation at mid-2007 ... – PowerPoint PPT presentation

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Title: February 2008


1
Romania Recent Macroeconomic Banking System
Developments
February 2008
NATIONAL BANK OF ROMANIA
2
CONTENTS
  • Recent Macroeconomic Developments.....3
  • Inflation Developments and Outlook
    .........7
  • Monetary Policy and Policy Mix ..........
    .22
  • Real Sector Developments ........28
  • External Sector ..34
  • Exchange Rate Regime ...41
  • Fiscal Position ...56
  • Monetary Data .......59
  • Financial System ......71
  • Euro Adoption .......76
  • Economic Relations with the USA .......84

3
Recent Macroeconomic Developments
4
Recent Macroeconomic Developments (1)
  • CPI inflation
  • Annual rate
  • 6.57 (Dec. 2007/Dec. 2006)
  • 7.26 (Jan. 2008 /Jan. 2007)
  • Average annual rate
  • 4.84 in 2007
  • 5.11 (Feb. 2007-Jan. 2008)/( Feb. 2006-Jan.
    2007)
  • GDP growth
  • 2006 7.9 based on increases in final
    consumption by 9.3 (private consumption grew
    11.4) and in investment by 19.3
  • Jan.-Sep. 2007 5.8 based on increases in final
    consumption by 9.7 (private consumption grew
    9.9) and in investment by 25.3
  • Current account deficit
  • 2006 EUR 10.2 bn., up 47.4 yoy (10.4 of GDP)
    86 covered by FDI
  • 2007 EUR 16.9 bn., up 66.1 yoy (14.4 of GDP)
    42 covered by FDI
  • Foreign Direct Investment
  • 2006 EUR 8.7 bn., up 66.6 yoy
  • 2007 EUR 7 bn., down 19 yoy

5
Recent Macroeconomic Developments (2)
  • Fiscal balance (IMF Methodology)
  • 2006 -1.5 of GDP
  • 2007 (preliminary data) -2.4 of projected GDP
  • International reserves (foreign currency
    including gold)
  • 2007 EUR 27.2 bn. forex reserves EUR 25.3 bn.
  • January 31, 2008 EUR 27.6 bn.
  • forex reserves EUR 25.6 bn. (covering about 4.8
    months of prospective goods-and-services imports)
  • Financial intermediation
  • 2007 forecast 37.9 of GDP
  • Real growth of loans to the private sector
  • 2007 50.5 (RON 30.6 foreign currency 72.6)

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Inflation Developments and Outlook
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Potential Causes for Deviation of Inflation
Rate from the Projected Path
  • Wage increases overtaking productivity gains
  • Protraction or even worsening of the
    wage-productivity mismatch might lead to a
    dangerous wage-inflation spiral
  • Implementing a looser budget policy, specific to
    an election year
  • Failure to achieve the planned dynamics of budget
    revenues and making unforeseen public
    expenditures
  • Financing current expenditures to the detriment
    of capital expenditures
  • Faster deterioration of inflation expectations
  • Higher oil prices
  • Further increase in the oil price is a plausible
    scenario on international markets
  • Good agricultural year
  • Boosted by a favourable base effect, the
    larger-than-expected increase in agricultural
    output (the projection assumes an average
    agricultural year for 2008) would have a sizable
    impact on food prices
  • The Governments commitment on
  • Wage increases in line with productivity gains
  • Narrowing of the budget deficit
  • Improvement of public spending structure

20
Consequences of Risks Associated with the
Projection Materialising
  • Nature of risks and uncertainties associated with
    the current medium-term projection is generally
    similar to the previous one (November 2007)
  • HOWEVER
  • In the event of upside risks to inflation
    materialising especially if occurring
    simultaneously, this could have more severe
    consequences given the tensions in the
    international and domestic environments
  • The effects of the fiscal easing which in the
    previous years had allowed companies to absorb
    cost-related shocks without their having a major
    impact on inflation have faded
  • External financing will be available at higher
    costs, at least for a period of time

21
Maintenance of Inflation Targets for 2008 and
2009
  • Even though annual inflation rate is projected to
    exceed the upper limit of the annual variation
    band until 2009 Q1, the NBR has chosen to tighten
    its monetary policy stance instead of revising
    inflation targets
  • Over a period marred by numerous uncertainties
    and exogenous shocks, it is of the essence to
  • Bring inflation as fast as possible back to the
    announced medium-term disinflation trajectory
  • Ensure the sustainability of disinflation by
    avoiding a wider current account deficit

22
Monetary Policy and Policy Mix
23
Decisions of the NBR Board
  • To raise the monetary policy rate three times in
    the last 4 months (by 0.5 pp in November 2007, by
    0.5 pp in January 2008, and by 1 pp in February
    2008) to 9.0 percent p.a., from 7.0 percent
  • Proactive measures substantiated by
  • worsening of the short-term inflation outlook
  • need for efficient anchoring of inflation
    expectations
  • boost in saving by ensuring a real positive
    interest rate, considering the need to reduce the
    savings/investment imbalance, aimed at correcting
    the external deficit
  • To continue to pursue a firm management of money
    market liquidity via open-market operations
  • Ensure efficient transmission of the monetary
    policy signal
  • Contain the volatility of short-term money market
    rates
  • To adopt additional prudential measures,
    including higher provisioning for foreign
    exchange-denominated loans to unhedged borrowers
  • To leave unchanged the existing minimum reserve
    requirement ratios on both RON- and foreign
    currency-denominated liabilities of credit
    institutions

24
Prudential Measures Adopted in the NBR Board
Meeting of February 2008
  • Separate recognition of the currency risk effects
    assumed by borrowers, natural entities, through
    additional provisioning of foreign
    currency-denominated loans to unhedged borrowers
    (individuals who do not earn incomes in the loan
    denomination currency)
  • Lenders must submit to the NBR their amended
    internal lending norms, within 30 days from
    publication of the new provisions in the Official
    Gazette, so that they comply with the recently
    adopted requirements

25
Economic Policy Mix and Macro-stability (1)
  • The economic policy mix is more important than
    any of its components
  • ?
  • A restrictive monetary policy can offset only
    partly the lack of support from
    budget and fiscal policies and income policy
    in attaining the price stability
    objective
  • Usually, over the short term
  • By taking the risk of persistent distortions,
    whose subsequent correction by the authorities is
    costly and lengthy, a spontaneous correction
    could be massive and disorderly
  • ?
  • The outcome is suboptimal in terms of real
    convergence in the medium and long term

26
Economic Policy Mix and Macro-stability (2)
  • The economic policy mix needs to be
    reconsidered all the more so as
  • Turbulence on world markets is persistent
  • The increasing international prices of agri-food
    items, energy and gold fuelled inflation
  • Romanias external deficit has widened to
    unsustainable levels ? need for gradual
    correction (to avoid disorderly correction)
  • Domestic currency appreciation is unlikely to be
    a major contributor to disinflation
  • Wage pressures will remain high in the context
    of EU integration

27
Optimal Economic Policy Mix
  • Continuation of structural reforms so as to boost
    the growth of productivity and external
    competitiveness of Romanian products
  • High monetary policy restrictiveness
  • Tighter-than-expected fiscal policy, likely to
    help narrowing macroeconomic imbalances
  • Containment of public spending growth and its
    channelling mainly towards public investment
    meant to foster the production potential of the
    economy
  • Improved budget planning by approving multiannual
    budgets and ensuring a uniform and predictable
    budget execution
  • An income policy matching productivity gains

28
  • Real Sector Developments

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  • External Sector

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  • Exchange Rate Regime

42
Liberalization of International Flows
  • 1998 Current account operations (Art. VIII of
    IMF Articles of Agreement)
  • 1999 Medium- and long-term capital inflows
  • 2001-2002 Capital flows with low impact on the
    balance of payments
  • 2003-2004 Capital flows with significant impact
    on the real sector
  • 2005-2006 Capital flows with significant impact
    on the balance of payments
  • September 2006 Full convertibility of the
    national currency

43
Exchange Rate implications of full
convertibility
  • Full convertibility of the RON renders monetary
    policy conduct difficult
  • Massive inflows of speculative capital put
    downward pressure on the exchange rate of the RON
  • Support disinflation in the short term
  • BUT
  • Imply risks to financial stability
  • great likelihood of a reversal in speculative
    flows
  • keener interest in forex borrowings ? increase in
    external indebtedness of domestic companies,
    particularly in the short term ? currency risk
    overexposure
  • Foster excess demand

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Exchange Rate Recent Developments and Outlook
  • The nominal appreciation trend manifest over the
    past three years came to a halt
  • The RON exchange rate reverted to a trajectory
    compatible with macroeconomic fundamentals,
    following the overappreciation at mid-2007
  • The correction was faster and larger due to the
    increased risk aversion of investors, caused by
    the US sub-prime mortgage crisis
  • In spite of the unfavourable short-term impact on
    inflation, exchange rate flexibility is an
    advantage, as it
  • Allows the avoidance of excessive accumulation of
    macroeconomic imbalances which may generate
    crises
  • Operates as a self-correcting mechanism of
    current imbalances, alleviating the impact of
    external shocks
  • Return to a nominal appreciation trend is
    sustainable only in the context of productivity
    gains able of improving external competitiveness

48
Daily Nominal Exchange Rates (local currency/EUR)
Source Eurostat, National Bank of Romania
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Daily Nominal Exchange Rates (local currency/EUR)
Source Eurostat, National Bank of Romania
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  • Fiscal Position

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  • Monetary Data

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  • Financial System

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share in total banks () December 2007 share in total banks () December 2007 share in total banks () December 2007 share in total banks () December 2007
Total assets Non-govt. credit Non-bank clients' deposits
Banks with majority foreign capital 87.3 88.2 83.3
Banks with majority domestic private capital 7.8 8.2 10.6
Banks with majority domestic state-owned capital 4.9 3.6 6.2

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  • Euro Adoption

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Post-Accession Period Challenges to Continuation
of Disinflation
  • Pressures exerted by movements in relative prices
  • Further adjustments of administered prices
    (especially energy price)
  • Still strong domestic demand
  • External shocks (increases in oil and commodity
    prices on external markets)

81
Euro Adoption (1)
  • 1. Prior to ERM II entry
  • Consolidation of low inflation
    (sustainable disinflation)
  • Establishment of domestic market for long-term
    capital and interest rate convergence
  • Relative stability of the RON exchange rate
    (amid full convertibility) around
    the long-term equilibrium level (sustainable
    exchange rate)
  • Fostering of structural reforms

82
Euro Adoption (2)
  • 2. Timing of ERM II entry is set for 2012
  • In order to ensure a period needed to
  • fulfill nominal convergence criteria
  • achieve substantial progress in real convergence
  • 3. Euro zone entry expected for 2014

83
ERM II Entry and Inflation Targeting
  • Inflation targeting strategy will be kept
    in place until ERM II entry at least
  • Cohabitation between inflation targeting and
    an explicit exchange rate target is
    challenging
  • Inflation targeting ensures gradual achievement
    of the Maastricht criteria and is supportive of
    real convergence

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Economic Relations with the USA
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