Romania and the international financial and
economic crisis
Ionut DUMITRU
Chief-Economist Raiffeisen Bank Romania
“Challenges and Opportunities during an Economic Downturn - A Practical Guide in the Romanian Market”,
American Chamber of Commerce in Romania
February 2009
Slide 1 / 12.03.2016
International crisis – multiple causes

Low interest rates and ample liquidity in the markets
triggered a decrease in risk aversion and an undervaluation
of risk worldwide
Key interest rates of major central banks
–
Investors were more eager to invest in risky assets and in risky
countries (ignoring increasing imbalances)
–
There was a asset price bubble (i.e. housing bubble in the United
States)
7
–
Underestimation of risks for sophisticated financial instruments
5
–
Explosion of subprime lending and securitization activities in US
4
–
Lax regulation of the new investment instruments
3
–
Large leverage based on short-term borrowing
2
Stimulative monetary policies
worldwide
- low interest rates
- ample liquidity in the markets
6
1

Following the monetary policy tightening, the US housing
bubble burst and the subprime crisis begun (summer of
2007).
0
2000
2001
2002
2003
2004
Key interest rate in US (%)
Key interest rate in Swiss (%)
2005
2006
2007
2009
Key interest rate in Euro Zone (%)
Key interest rate in Japan (%)
Source: Central banks’ websites, Raiffeisen RESEARCH
Slide 2 / 12.03.2016
2008
International crisis – effects worldwide

Turmoil (turbulence) – financial crisis – economic crisis.

Direct effects due to losses stemming from exposures in “toxic assets”.

Major change in investors’ behaviour: increasing risk aversion; from global excess liquidity to liquidity crunch.

Credit markets ceased to function as the confidence between the financial institutions and between banks decreased
sharply.

Turmoil in the financial market started to affect the real economy: many developed economies entered into recession.

Central banks and governments worldwide reacted rapidly in order (1) to restore the confidence in the financial markets
and (2) to limit the impact of crisis on the real economy
–
–
–
–
–
Slide 3 / 12.03.2016
Ample injections of liquidity in the financial system from central banks (by extension of collateral and of credit terms)
Large cuts in the monetary policy rates
Deposit and interbank guarantees, and loans for financial institutions
Central banks and the governments took stakes in financial institutions (recapitalization through nationalization)
Anti-crisis packages are now in place in many countries
International crisis – effects on Romania

No direct effects of the subprime crisis on the Romanian economy
–

Banks in Romania had no direct exposure to the subprime market in the US, while mother banks abroad had also only a very low exposure to “toxic
assets”.
Important indirect effects because Romania is highly dependent on the external funding (current account deficit stood at 12.6% of
GDP in 2008).
External debt and the debt of banking sector (% of GDP, 2008 Q2)
Current account deficit (% of GDP, 2008 Q2)
LV
LT
EE
RO
BG
SK
HU
PL
5
CZ
2.2
0
120
100
-1.6
-5
-3.1
-4.2
-5.6
-7.1
-10
-6.9
-6.1
-2.5
80
-5.0
60
-8.7
40
-12.7
-15
140
-14.5
-15.5
-14.1
-13.9
20
-20
-19.7
0
-24.2
-25
Current account balance +FDIs (%of GDP)
Current account deficit (%din PIB)
Source: Eurostat, National Bank of Romania, Raiffeisen RESEARCH
Slide 4 / 12.03.2016
LV
EE
HU
BG
LT
SK
PL
Total external debt (% of GDP)
Short-term external debt (% of GDP)
Debt of banking sector (% of GDP)
RO
CZ
Romania – main challenges

The crisis on the international markets and the large domestic macroeconomic
disequilibria raise important challenges for the government and the central bank

Challenges in short-term
–
–
–

Securing external financing
Securing stability of the financial system
Dealing with the downturn in the economic activity
Challenges in long-term
–
–
Slide 5 / 12.03.2016
Continuing the real and nominal convergence process in order to become a member of the Euro area
Securing sustainability of the current account deficit
Romania – securing external financing (1)

Romania was strongly affected by the increase in risk
aversion due to large macroeconomic imbalances and
inappropriate economic policies (i.e. proc-cyclical fiscal
policy)
–
S&P and Fitch cut the country’s ratings to non-investment grade
5-years CDS for CEE countries
800
700
Romania
Bulgaria
Hungary
Source: Bloomberg, Raiffeisen RESEARCH
Slide 6 / 12.03.2016
Poland
Jan-09
Nov-08
Sep-08
Jul-08
May-08
0
Mar-08
Pressures for leu depreciation
100
Jan-08

200
Nov-07
Cost of external funds increased sharply
300
Sep-07

400
Jul-07
–
–
Foreign banks reduced additional funding to their local
subsidiaries
FDIs inflows are likely to decrease in the next period
Foreign investors might decide to repatriate their profits
500
May-07
–
600
Mar-07
Availability of external funding decreased rapidly in the
context of an ongoing process of international
deleveraging
Jan-07

Czech Republic
Romania – securing external financing (2)



Current account deficit started to decrease, which means lower financing needs from abroad
However, the current account deficit is still high and the short-term debt service is also important
Romania could ask for financial help to the European Commission and the IMF.
Current account and foreign trade balance
2004
2005
2006
2007
2008E
2009E
2010E
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
Current account balance (% of GDP)
Foreign trade balance (% of GDP)
Source: National Bank of Romania, Raiffeisen RESEARCH
Slide 7 / 12.03.2016
Romania – Securing stability of the financial
system

Stability of the exchange rate is a “vital” issue for the economy

The leu was on a depreciating trend in last months, but the move was in line with developments in the other regional currency

In order to limit leu depreciation, the central bank stepped in the FX market indirectly and had a strong control of RON liquidity in the market
Regional exchange rates
Loans in foreign currencies (% of total)
100
130
125
EUR/ RON
EUR/ HUF
EUR/ PLN
EUR/ CZK
80
120
60
115
40
110
20
105
100
Czech
Republic
Poland
Romania
Hungary
Lithuania
90
Croatia
95
Estonia
Latvia
0
Loans to companies in FCY (% of total)
85
Dec-07
Feb-08
Apr-08
Jun-08
Fixed base index, 29 December 2007=100
Slide 8 / 12.03.2016
Aug-08
Oct-08
Dec-08
Loans to households in FCY (% of total)
Source: Reuters, National Bank of Romania, Raiffeisen RESEARCH
Romania – dealing with the downturn in the
economic activity (1)

Romanian economy expanded by more than 6% per year between 2001-2007

However, economic activity would decelerate rapidly in the next quarters (with important recession risk)
–
Recession from Euro area puts downward pressures on exports
–
Decrease in external funding limits capacity of banks to extend lending and of companies to invest  sharp deceleration of consumption and
investments
Average GDP growth rate in NMS (2001-2007 )
Worst performers in industry at the end of 2008 (% yoy)
Real GDP growth (% yoy)
Forecasts
Sep-08
Oct-08
Nov-08
Metallurgy
-18.3
-25.7
-41.1
Textiles
-33.0
-39.5
-34.3
12.6
-3.2
-29.7
9.1
8.5
7.9
Average 2001-2007 = 6.1%
6.1
Transport means (vehicles)
6.2
5.6
Chemicals
4.5
3.8
2.1
Source: Eurostat, Raiffeisen RESEARCH
Slide 9 / 12.03.2016
LV
EE
LT
SK
RO
BG
CZ
PL
5.7
HU
EU 27
EA
1.8
4.0
5.1
5.2
8.5
4.2
7.9
6.2
7.2
0.5
2.5
2001 2002 2003 2004 2005 2006 2007 2008F 2009F 2010F
11.7
-6.2
-28.3
Electric appartus, machinery
-16.4
-21.9
-25.3
Other transport means
-11.3
-23.8
-19.7
0.9
-10.5
-15.3
Fabricated metal products
-4.3
-12.2
-12.1
Pulp and paper products
-10.6
-9.4
-11.4
Radio, television, optical
Romania – dealing with the downturn in the
economic activity (2)
The government’s space of manoeuvre is limited




The large budget deficit (around 5% of GDP) and the downward pressures on the public
revenues limit the capacity of government to expand public spending in order to offset the
slowdown in private aggregate demand
Financing a large budget deficit is also difficult (and costly) due to the financing constraint
both on the local market and on the external markets
This explains the lack of a strong anti-crisis package for the economy
At the moment, the government should concentrate more on the increase of public
spending efficiency and on the increase of structural funds absorption
Consolidated budget deficit (% of GDP)
2003
2004
2005
2006
2007
2008E
0%
-1%
-2%
-3%
The central bank’s space of manoeuvre is also limited



Central bank remains focused on the exchange rate stability
As a result, the stance of the monetary policy is likely to be eased only gradually.
A more coherent macroeconomic policy mix (more restrictive Government
policies) will reduce de monetary policy burden.
-4%
-4.9%
-5%
-5.2%
-6%
Consolidated budget deficit (% of GDP, national methodology)
Consolidated budget deficit (% of GDP, ESA 95 methodology)
Source: Finance Ministry, Raiffeisen RESEARCH
Slide 10 / 12.03.2016
Romania – dealing with the downturn in the
economic activity (3)

There are some mitigating factors which might help the economy to avoid a hard landing in the next period:
–
–
–
–
–
Relatively lower share of credit in GDP;
The banking system is fundamentally sound and profitable;
Lower dependency on exports;
Exchange rate flexibility;
Large EU structural funds available for Romania.
Non-government credit in 2007 (% of GDP)
Exports of goods and services in 2007 (% of GDP)
120
100
100
80
80
60
60
40
40
20
20
0
0
RO
PL
Euro
area
LV
LT
BG
Source: Eurostat, ECB, Raiffeisen RESEARCH
Slide 11 / 12.03.2016
SI
EE
CZ
HU
SK
RO
PL
SK
CZ
HU
LT
BG
EE
LV
EA
Romania – Appropriate measures required to
support the real convergence process



Long-run economic growth potential is strong given that GDP per capita is very low
The government should avoid to pursue pro-cyclical fiscal policies and it should concentrate on investment expenditures
(especially infrastructure) an absorption of structural funds;
A more appropriate policy mix is required.
82
89
Czech Republic
Slovenia
93
98 101
Greece
77
Malta
Hungary
75
Portugal
Lithuania
72
Estonia
Latvia
69
Slovakia
60
Croatia
42
55
58
63
54
Poland
41
Turkey
38
Romania
European Union 27 =100
Cyprus
GDP per capita at purchasing power parity in 2007 (% of EU 27)
107
110
Note: The dark blue lines denote the value of the indicator in 2000
Source: Eurostat, Raiffeisen RESEARCH
Slide 12 / 12.03.2016
Euro area
Spain
Italy
Bulgaria
Macedonia
29