NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
1NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
2
I. 2000-2008: a period of catching-up and growing imbalances
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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
Source: National Bank of Romania, National Institute of Statistics
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 …
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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
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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
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Fastest components
By maturity: short-
term debt
By debtor: private
debt
Rapid increase in external debt after 2004Rapid increase in external debt after 2004
Source: National Bank of Romania
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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“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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
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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
Source: National Bank of Romania
RON/EUR (daily data)
NBR's decision to pursue a more flexible exchange rate
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II. Impact of the global financial crisis on the Romanian economy
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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
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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)
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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)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
annual percentage change
f) IMF forecast
Significant economic contraction in 2009, gradual recovery aheadSignificant economic contraction in 2009, gradual recovery ahead
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-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 …
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… … 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
annual percentage change
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
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Source: National Bank of Romania, National Institute of Statistics
-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
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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
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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
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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
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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III. Current account adjustment:
stylised facts and the case of Romania
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
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-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 yearsbefore LCI
No. of yearsbefore LCI
No. of yearsbefore LCI
No. of yearsafter LCI
No. of yearsafter LCI
No. of yearsafter 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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
Source: National Bank of Romania
RON/EUR
Depreciation, followed by moderate exchange rate volatilityDepreciation, followed by moderate exchange rate volatility
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA
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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
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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
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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
Source: National Bank of Romania, National Institute of Statistics
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