NATIONAL BANK OF ROMANIA 1. 2 I. 2000-2008: a period of catching-up and growing imbalances.

NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA

1NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA


2

I. 2000-2008: a period of catching-up and growing imbalances


3

Real GDPReal GDP

Steady economic growth between 2000 and 2008

Annual average: 5.8 percent

Drivers: catching-up, increased capital inflows due to improved risk perception (EU accession, NATO membership)

-20

-15

-10

-5

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

-16

-12

-8

-4

0

4

8

12

16

20net exports

change in inventories*

gross fixed capital formation

final consumption

GDP (rhs)

contribution to annual change, pp annual change, %

Source: NIS, NBR calculations * including statistical discrepancy


4

Disinflation manifest for most of the period

Since 2004, national currency appreciation and falling external prices channelled excess demand pressures toward widening current account deficit

Temporary trend reversal in August 2007 due to supply-side shocks on both domestic and foreign markets (food and energy, in particular) and to the first wave of the global financial turmoil

0

10

20

30

40

50

60

Jan.

00

Jan.

01

Jan.

02

Jan.

03

Jan.

04

Jan.

05

Jan.

06

Jan.

07

Jan.

08

headline inflation

core inflation*

Source: National Institute of Statistics, NBR calculations

annual percentage change

* CPI excl. administered prices, volatile prices and prices of main excisable goods

Inflation rateInflation rate


5

-3.7

-5.5

-3.3

-5.8

-8.4 -8.6

-10.4

-13.5

-11.8

2000 2001 2002 2003* 2004* 2005* 2006* 2007* 2008*

percent of GDP

*) including reinvested earningsSource: National Bank of Romania, National Institute of Statistics

Widening of current account deficit to unsustainable levelsWidening of current account deficit to unsustainable levels


6

Significant FDI flows, but lower coverage of current account deficit Significant FDI flows, but lower coverage of current account deficit towards the end of the periodtowards the end of the period

-3.1-5.1

-6.9-10.2

-16.7 -16.2

1.95.1 5.2

8.77.0

9.3

-1.6-2.5-1.5

1.21.2 1.3

-20

-15

-10

-5

0

5

10

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: National Bank of Romania

foreign direct investment

current account balance

EUR billion


7

Positive correlation between trade deficit and the flow* of loans to the private sector

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008

percent of GDP

loans to the private sector (flow)

trade deficit

* determined as difference between credit stock at the end of two consecutive years

Source: National Bank of Romania, National Institute of Statistics


8

9.3

20.7

26.8

35.939.3

15.311.8

10.1

16.6

-10

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008


percent

-10

0

10

20

30

40

50

60

financial intermediation* loans to the private sector (rhs)

real annual change, percent

*) loans to the private sector/GDP

Fast-paced deepening of financial intermediation …Fast-paced deepening of financial intermediation …


9

Average annual gains in financial intermediation*, 2000-2008

-2

0

2

4

6

8

10

Bu

lga

ria

Cze

chR

ep

ub

lic

Est

on

ia

Hu

ng

ary

La

tvia

Lith

ua

nia

Po

lan

d

Ro

ma

nia

Slo

vaki

a

Slo

ven

ia

percentage points

Source: IMF, International Financial Statistics; National Bank of Romania * loans to the private sector/GDP

……but not as fast as in some peer countriesbut not as fast as in some peer countries


10

0

20

40

60

80

100

120

140

160E

uro

Are

a

Bu

lga

ria

Cze

chR

ep

ub

lic

Est

on

ia

Hu

ng

ary

La

tvia

Lith

ua

nia

Po

lan

d

Ro

ma

nia

Slo

vaki

a

Slo

ven

ia

Cro

atia

Ma

ced

on

ia

Tu

rke

y

Source: IMF, International Financial Statistics; National Bank of Romania

63.9% region average

percent

* loans to the private sector/GDP

Financial intermediation* still below region’s average in 2008Financial intermediation* still below region’s average in 2008


11

Average annual growth rate of bank liabilities, 2000-2008

0

10

20

30

40

50

60

70B

ulg

aria

Cze

chR

ep

ub

lic

Est

on

ia

Hu

ng

ary

La

tvia

Lith

ua

nia

Po

lan

d

Ro

ma

nia

Slo

vaki

a

Slo

ven

ia

percent

term deposits

foreign liabilities

Source: IMF, International Financial Statistics; National Bank of Romania

Strong reliance of banks on foreign resourcesStrong reliance of banks on foreign resources


12

Fastest components

By maturity: short-

term debt

By debtor: private

debt

Rapid increase in external debt after 2004Rapid increase in external debt after 2004


MLT external debt

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

public and publicly guaranteeddebt private debt

deposits of non-residents

EUR billion

Total external debt

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

ST debt(majority private debt)

MLT debt

EUR billion


13

“3 percent” SGP threshold

observed for most of the

period, but…

… progressive deterioration

in fiscal position since 2006,

culminating in a substantial

breach of the threshold in

2008

-4.4-3.5

-2.0-1.5 -1.2 -1.2

-2.2-2.6

-5.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Ministry of Public Finance, National Institute of Statistics

percent of GDP, ESA95 methodology

General government balanceGeneral government balance


14

Following the liberalisation of forex market in the 1990s, Following the liberalisation of forex market in the 1990s, the NBR implemented a managed float regimethe NBR implemented a managed float regime

Rationale

Allows flexibility in dealing with real external shocks (including terms of trade shocks)

External competitiveness is preserved, mitigating the consequences of an external demand contraction on the current account deficit and further on the real sector

Avoids excessive exchange rate volatility, which negatively affects expectations

Such a regime was consistent with gradual capital account liberalisation


15

Reasons for maintaining the managed float Reasons for maintaining the managed float after adopting inflation targeting in 2005after adopting inflation targeting in 2005

The constraint deriving from massive capital inflows, which would have led, should the NBR not have intervened, to an even larger overappreciation of the national currency

The loose wage policy resulting in pay rises overtaking productivity dynamics, reducing the previously accumulated competitiveness gains

The pro-cyclical stance of fiscal policy that added to the vulnerabilities associated with the current account deficit widening


16

Nominal exchange rate

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan

.00

Jan

.01

Jan

.02

Jan

.03

Jan

.04

Jan

.05

Jan

.06

Jan

.07

Jan

.08


RON/EUR (daily data)

NBR's decision to pursue a more flexible exchange rate


17

II. Impact of the global financial crisis on the Romanian economy


18

Limited impact on the Romanian banking system

and domestic economy due to:

Non-exposure to “toxic assets” which lay at the root

of the crisis

Prevalence of traditional banking products, which

were attractive enough to credit institutions

Prudential and administrative measures adopted

by the NBR

Global financial crisis: direct effects on RomaniaGlobal financial crisis: direct effects on Romania


19

Indirect effects have become manifest, their spill-over being detected via the following channels:

I. Foreign trade channel

II. Financial channel

III. Confidence channel

IV. Exchange rate channel

V. Wealth and balance sheet effects channel

Global financial crisis and recession: Global financial crisis and recession: indirect effects on Romania (1)indirect effects on Romania (1)


20

I. Foreign trade channel

Worsening economic growth prospects in EU Member States, Romania’s main trade partners => negative impact on exports

Mitigating factor: lower trade openness as compared to other Central and East European countries

II. Financial channel

Diminished access to external financing => impact on the lending volume, especially forex loans, and higher debt service for private companies

Mitigating factor: still low level of financial intermediation

Global financial crisis and recession: Global financial crisis and recession: indirect effects on Romania indirect effects on Romania (2)(2)


21

III. Confidence channel

Decrease in risk appetite of foreign investors relative to emerging economies => decline in foreign (direct and portfolio) investments

IV. Exchange rate channel Lower foreign currency inflows => downward pressure on the leu

V. Wealth and balance sheet effects channel Deterioration of households’ and companies’ net assets owing to:

Large share of foreign currency financing and a weaker domestic currency

Reduction in asset prices

Global financial crisis and recession: Global financial crisis and recession: indirect effects on Romania indirect effects on Romania (3)(3)


22

4.2

7.9

6.27.1

-8.5

0.5

4.6

2005 2006 2007 2008 2009f 2010f 2011f

Source: National Institute of Statistics, International Monetary Fund


f) IMF forecast

Significant economic contraction in 2009, gradual recovery aheadSignificant economic contraction in 2009, gradual recovery ahead


23

-2

0

2

4

6

8

10D

ec.

05

Fe

b.0

6

Ap

r.0

6

Jun

.06

Au

g.0

6

Oct

.06

De

c.0

6

Fe

b.0

7

Ap

r.0

7

Jun

.07

Au

g.0

7

Oct

.07

De

c.0

7

Fe

b.0

8

Ap

r.0

8

Jun

.08

Au

g.0

8

Oct

.08

De

c.0

8

Fe

b.0

9

Ap

r.0

9

Jun

.09

Au

g.0

9

Oct

.09

market prices excluding volatile prices

volatile prices

administered prices

contribution to annual inflation rate; percentage points

Source: National Institute of Statistics, National Bank of Romania calculations

Disinflation resumed in 2009 …Disinflation resumed in 2009 …


24

… … and it is projected to continue in 2010-2011and it is projected to continue in 2010-2011

-2

-1

0

1

2

3

4

5

6

7

8

9

10

I2009

II III IV I2010

II III IV I2011

II III

uncertainty interval

variation band*

4-quarter inflation rate

target


Inflation targets (Dec./Dec.) 2009: 3.5% 2010: 3.5% 2011: 3.0%

*) ±1 percentage point around the central target

Source: National Institute of Statistics, National Bank of Romania calculations

Note: according to November 2009 Inflation Report


25


-20

0

20

40

60

80

100

120

140

De

c.0

5M

ar.

06

Jun

.06

Se

p.0

6D

ec.

06

Ma

r.0

7Ju

n.0

7S

ep

.07

De

c.0

7M

ar.

08

Jun

.08

Se

p.0

8D

ec.

08

Ma

r.0

9Ju

n.0

9S

ep

.09

lei-denominated loans

total

foreign-currency-denominated loans

-20

0

20

40

60

80

100

120

140

De

c.0

5M

ar.

06

Jun

.06

Se

p.0

6D

ec.

06

Ma

r.0

7Ju

n.0

7S

ep

.07

De

c.0

7M

ar.

08

Jun

.08

Se

p.0

8D

ec.

08

Ma

r.0

9Ju

n.0

9S

ep

.09

households

total

non-financial corporations & financialcorporations other than MFIs

real annual percentage change*

*) based on CPI

real annual percentage change*

More difficult access of private sector to bank loansMore difficult access of private sector to bank loans


26

The authorities’ responseThe authorities’ response (1) (1)

Arrangement signed with the IMF, EU and other IFIs meant to:

Reduce the magnitude of the recession

Restore credibility regarding external solvency

Ensure time consistency of macroeconomic policy mix

Function as a “crisis management programme”

Enhance the stability of the foreign banks’ exposure to Romania


27

The authorities’ responseThe authorities’ response (2) (2)

Made necessary by the loose fiscal and income policy stance pursued during the economic upturn

Worsening of external conditions (weaker external demand; investment reliance on external financing sources)

Insufficient public investment to offset the decline in private investment

Insufficient efforts to qualify for EU funds


28

Seven-step increase in monetary policy rate during October 2007 - July 2008 by a total of 3.25 percentage points

Maintenance of minimum reserve requirements at high levels: On lei-denominated liabilities: 20 percent

On foreign-exchange-denominated liabilities: 40 percent

Pursuance of a firm management over liquidity via open-market operations against the background of a gradual decline in the liquidity surplus

Prudential and administrative measures aimed at slowing down the expansion of credit to the private sector and at supporting lending in domestic currency to the detriment of forex credit

Policy Policy mmeaeasuresuress ttaakkeenn by theby the NBRNBR before September 2008 before September 2008


29

Gradual reduction in the monetary policy rate to 8 percent from 10.25 percent starting with 5 February 2009

Gradual lowering of the minimum reserve requirements:

On lei-denominated liabilities to 15 percent from 20 percent

On foreign-currency-denominated liabilities with residual maturities of less than two years from 40 percent to 25 percent

On foreign-currency-denominated liabilities with residual maturities of over 2 years from 40 percent to 0 percent

Liquidity management aiming to ensure adequate functioning of the interbank money market

Bilateral liquidity injections, mainly via banks’ access to the marginal lending facility

Amending the rules on interbank interest rates

Monetary policy Monetary policy mmeaeasuresuress ttaakkeenn by theby the N NBBRR after the change in global liquidity conditions after the change in global liquidity conditions


30

III. Current account adjustment:

stylised facts and the case of Romania


31

Romania: part of a synchronous cycleRomania: part of a synchronous cycle

Massive synchronous capital inflows are cyclical. Recent cycles:

1975-1982, followed by the debt crisis

1990-1993, followed by debt restructuring in emerging economies

2002-2008, which ended with the deepening of the financial crisis that broke out in July 2007; manifest in Romania from 2004 to 2008


32

DeterminantsDeterminants of the latest of the latest synchronous cyclesynchronous cycle

Positive economic outlook (and implicitly higher yield expectations) in emerging economies

Ample liquidity on international markets

Low yields in advanced economies

also triggered

the financial crisis


33

Trajectory of variablesTrajectory of variables

Pattern for developments in key macroeconomic variables amid lower capital flows (Reinhart and Reinhart, 2008; Algieri and Bracke, 2007): Drop in GDP, as the pace of resuming growth depends on the

destination and manner of managing capitals during inflow periods

Real depreciation of the domestic currency, due originally to nominal depreciation and subsequently to declining inflation

Short-term increase in inflation, as a result of nominal depreciation of the domestic currency, followed by a fall in inflation owing to the economic slowdown and pessimistic expectations on future performance of the economy; monetary policy renders this pattern less certain

Narrowing of the current account deficit


34

-4 -3 -2 -1 0 1 2 3 4

1. Current account deficit(% in GDP)

-4 -3 -2 -1 0 1 2 3 4

2. Real GDP(annual change)

4. Real exchange rate (annual change)

-4 -3 -2 -1 0 1 2 3 4

3. Inflation rate (Dec./Dec.)

-4 -3 -2 -1 0 1 2 3 4

appreciation

depreciation

perc

ent

perc

ent

perc

ent

perc

ent

No. of yearsbefore LCI




No. of yearsafter LCI




LCI: large capital inflows

Source: Stylised facts based on the results shown in the professional literature. For the most recent empirical assessments, Reinhart and Reinhart (2008).

Reversal in capital flows: stylised factsReversal in capital flows: stylised facts


35

Sharp adjustment in current account deficit to below 5% of GDP in 2009Sharp adjustment in current account deficit to below 5% of GDP in 2009

-8.6

-10.4

-13.5

-11.8

-4.6 -5.1 -5.3

2005 2006 2007 2008 2009f 2010f 2011f

percent of GDP

Note: current account balance includes reinvested earnings

Source: National Bank of Romania, National Institute of Statistics, National Commission of Prognosis

f) NCP forecast


36

The adjustment would have occurred The adjustment would have occurred even without the crisiseven without the crisis

Some developments had become unsustainable

Sources of adjustments would have been the same:

Lower external financing

Confidence crunch

Decline in external demand for pricier exports


37

The crisis acted as a trigger The crisis acted as a trigger

Starting with the latter half of 2007:

Considerably lower liquidity on world markets

Growing risk aversion of foreign investors as

regards investments in emerging economies

Difficulties faced by host economies


38

The crisis sped up the adjustmentsThe crisis sped up the adjustments

Due to the crisis, the following adjustments took place earlier and faster:

Lower external financing for Romania

Decline of confidence in Romania’s capability to adjust, given the external imbalances

Weaker external demand for Romanian exports


39

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

Jan.07 Jan.08 Jan.09


RON/EUR

Depreciation, followed by moderate exchange rate volatilityDepreciation, followed by moderate exchange rate volatility


40

NBR’s interventions in the forex marketNBR’s interventions in the forex market

Meant to keep the exchange rate in line with macroeconomic fundamentals by: Avoiding excessive weakening of the domestic currency

Ensuring that exchange rate developments are consistent with the progress in current account adjustment

Calibrated in line with developments in official forex reserves

Used also as a tool for money market liquidity management, especially given that the public deficit has been financed, over certain periods, by resorting chiefly to funds released under the arrangement with the IMF, EU and other IFIs


41

Adequate resources for forex interventions Adequate resources for forex interventions

Historical build-up of forex reserves in the period of massive capital inflows

Outright purchases in order to limit the overappreciation of the domestic currency and for precautionary reasons

High minimum reserve requirements on foreign liabilities

Disbursements under the multilateral arrangement with the IMF, EU and other IFIs

Still comfortable levels of forex reserves after interventions in support of the domestic currency after the onset of the crisis


42

Foreign exchange reserves with the NBR: derived indicators

0

2

4

6

8

10

Jan.05 Jul.05 Jan.06 Jul.06 Jan.07 Jul.07 Jan.08 Jul.08 Jan.09 Jul.09


0

2

4

6

8

10times

official foreign exchange reserves - months of goods-and-services imports

official foreign exchange reserves/ST external debt (right-side scale)

months

NATIONAL BANK OF ROMANIA 1. 2 I. 2000-2008: a period of catching-up and growing imbalances.

Documents

national bank of romania

period slide

national currency appreciation

nato membership slide

external debt

real external shocks

external prices

external demand contraction