Download Current Account Deficits

NATIONAL BANK OF ROMANIA
I.
Recent Macroeconomic
Developments
Looking Back at 1999
• Economic growth: -1.2%
• Inflation rate: 54.8% (December/December)
• Fiscal deficit: 1.8% of GDP (but quasifiscal deficit larger)
• Current account deficit: 4.0% of GDP
2000-2003:
Sustainable Disinflation and Growth
• Gradual disinflation
• Robust economic growth
Inflation and GDP Growth
percentage change
60
6
50
5
40
4
30
3
20
2
10
1
0
0
-10
CPI inflation (Dec./Dec.)
GDP growth (right-hand scale)
-20
1999
2000
2001
2002
Source: National Institute of Statistics, National Bank of Romania
-1
-2
2003
2000-2003:
Sustainable Disinflation and Growth
• Gradual disinflation
• Robust economic growth
• Significant, but sustainable, current account deficits
• Moderate fiscal deficits and low public debt
Fiscal* and Current Account Deficits
8
percent of GDP
fiscal
7
current account
6
5
4
3
2
1
0
1998
1999
2000
2001
Source: Ministry of Public Finance, National Institute of Statistics
2002
2003
*) adjusted to IMF methodology
Gradual Disinflation
• Smooth disinflation path, without trend reversals
• Gradual approach chosen as:
– prices, tariffs and wages have recorded major adjustments
– external equilibrium has not yet been consolidated
• Supported by a consistent policy mix:
–
–
–
–
prudent monetary policy
cautious fiscal policy
sustainable income policy
structural adjustments
Robust Economic Growth
• Higher GDP growth rates than in most CEE countries
• Driven initially by external demand and afterwards by
domestic demand (on the back of rising wages and
loans)
Moderate Fiscal Deficits
and Low Public Debt
• The official financial accounts have been maintained under
control
• Fiscal deficit declined gradually from 4% of GDP in 2000 to
2.3% of GDP in 2003
• Quasifiscal losses are still significant (the quasifiscal deficit is
estimated to hover around 2.5% of GDP)
• The level of public debt (around 27% of GDP at end-2003)
compares favourably with that of other CEE countries
Current Account Deficits:
Significant, but Sustainable
 Moderate current account deficits in 2000 (3.7% of GDP) and 2002 (3.4% of GDP)
due to:
• Strong export expansion
• Supportive exchange rate policy
• Beneficial influence of substantial current transfers surplus
 Larger-than-foreseen current account deficit (5.8 of GDP) in 2003 due to:
• Weak external demand
• Substantial investment growth
• Rising household demand for imports
 No financing difficulties
• Satisfactory coverage through FDIs - although larger productivity-enhancing FDIs
desirable - and MLT external borrowings
• Adequate level of official forex reserves (covering 3.5 months of imports)
• Low foreign debt
8
percent of GDP
6
Current Account and Foreign Direct Investment
2003
current account deficit/GDP
foreign direct investment (net)/GDP
4
2
0
-2
-4
-6
-8
-10
Bulgaria
Czech
Republic
Hungary
Poland
Romania
Note: GDP forecast for Hungary and Poland
Source: Websites of central banks, EBRD - Transition Report 2003
Slovakia
Saving and Investment Ratios
24
percent of GDP
24
saving ratio
22.5
investment ratio
22
20
20
18.9
18.2
17.8
17.7
18
16.7
16
13.8
12
18
16
14.8
14
10
22
21.3
20.7
14
12
11.2
9.7
10
8
8
1998
1999
2000
2001
Source: National Institute of Statistics, NBR calculations
2002
2003
Gross Official Reserves
EUR million
9,000
8,000
9,000
gold
NBR foreign-exchange reserves
8,000
7,000
7,000
6,000
6,000
5,000
5,000
4,000
4,000
3,000
3,000
2,000
2,000
1,000
1,000
0
0
1999
2000
Source: National Bank of Romania
2001
2002
2003
2004
(6 May)
2004: Official Forecasts
• Economic growth: 5.5%
• CPI inflation rate: 9% (December/December)
• Fiscal deficit: 2.1% of GDP
• Current account deficit: 5.5% of GDP
II. Monetary Policy Coordinates
Major Guidelines
• Single-digit inflation rates in 2004 and in the years to come
• Interest rate policy: firm and transparent
• Exchange rate policy: managed floating regime preserved
• Inflation targeting: introduction envisaged for 2005
• Expected timing of euro-area entry: 5-6 years after EU accession
Inflation Rate
CPI; Dec./Dec.
54.8
40.7
target, 2004 - 2006
30.3
17.8
14.1
9.0
7.0
4.0
1999
2000
2001
2002
2003
2004
Source: National Institute of Statistics, Economic Pre-Accession Programme
2005
2006
Interest rate policy
• The current policy rate is high enough to encourage savings
and to smooth credit expansion
• Gradual downward adjustment of the policy rate is
envisaged once the disinflation trend has been confirmed
• Interest rate policy gains in transparency
Inflation Rate and Interest Rates
55
percent
percent
55
Jan.04
Jul.03
Jan.03
Jul.02
Jan.02
5
Jul.01
5
Jan.01
15
Jan.04
15
Jul.03
25
Jan.03
25
Jul.02
35
Jan.02
35
Jul.01
45
Jan.01
45
inflation rate (percentage change against
same year-earlier period)
average interest rate on ROL loans of nongov't, non-bank clients (percent p.a.)
deposit rate (time deposits; percent p.a.)
NBR's policy rate increased to 21.25% on November 20, 2003.
inflation rate (percentage change against
same year-earlier period)
NBR interest rate on sterilisation operations
(percent p.a.)
average yield on 3M T-bills (percent p.a.)
Source: National Institute of Statistics, National Bank of Romania
Financial Intermediation and Remonetisation
of the Economy
end of period, share of GDP
45
40
bank assets
non-government credit
35
30
24.7
23.2
23.0
25
32.6
31.6
30.2
28.9
M2
24.4
20
16.0
15
10
9.3
10.1
2000
2001
11.8
5
0
2002
Source: National Institute of Statistics, National Bank of Romania
2003
Financial Intermediation* in East and Central Europe
2003
45
41.7
41.0
40
32.6
35
32.5
30.0
30
27.6
25
20
16.2
15
10
5
0
Bulgaria
Czech
Republic
Hungary
Poland
Romania
Source: Websites of national statistics institutions and central banks.
Slovakia
Slovenia
*) non-government credit/GDP
Exchange rate policy
• The managed floating regime avoids excessive rate
fluctuations
• Central bank foreign interventions tend to be less frequent
and ample
• Euro link gets tighter – the current composition of the
currency basket is EUR 75% - USD 25%
• The preferred range of real exchange rate appreciation (2-4
percent) supports disinflation without endangering external
competitiveness
• The real appreciation generated by the Balassa-Samuelson
effect is not counteracted through exchange rate policy
Average Real Exchange Rate of the ROL
Against the Currency Basket
7
percentage change versus a year ago
7
6
6
5
5
4
4
3
achieved
4 months
3
2
2
1
1
0
0
2001
2002
2003
2004
Source: National Bank of Romania, National Institute of Statistics (NBR calculations)
achieved
indicative
range
Inflation targeting
• The monetary policy regime switch envisaged for 2005 (after enhancing
central bank credibility and inflation forecast capability)
• Increased transparency and accountability: Inflation Reports already
published (semiannual frequency)
• Monetary policy firmly committed to pursue the inflation targets and
relieved of supporting conflicting macroeconomic objectives
• Higher exchange rate flexibility (decreasing role of exchange rate as BoP
adjustor)
• Harmonization of monetary and fiscal policies (fiscal dominance on the
wane)
• Sound banking sector (but not yet fully-fledged financial system)
Macroeconomic Context
Before Adopting Inflation Targeting
Country
Czech
Republic
Year
preceding IT
introduction
CPI
inflation
rate
(annual
average)
1997
8.5
Current
account
deficit
(% of
GDP)
6.1
Fiscal
deficit
(% of
GDP)
0.9
Poland
1998
11.8
4.4
1.0
Hungary
2000
10.8
4.3
3.7
Romania
(forecasts)
2004
9.0
5.5
2.1
The road towards euro-area
• Sped-up nominal convergence, but without hurting the process of
real convergence
Romania: Nominal Convergence Indicators (1)
General Government
Deficit 1)
(percent of GDP)
2000
Maastricht
Criteria
Romania
1)
e)
2001
2002
General Government
Debt 1)
(percent of GDP)
2003e
2000
below 3 percent
-4.4
-3.5
According to ESA95 methodology
estimate
Source: MoPF, NIS, NBR
-2.0
2001
2002
2003e
below 60 percent
-2.0
23.9
23.1
22.7
21.8
Romania: Nominal Convergence Indicators (2)
2000
Maastricht
Criteria
Romania
Long-term Interest Rates
Exchange Rate (vs. euro)
(average)
(percent per annum)
(annual percentage change)
2001
2002
2003
<1.5 pp above the best
performing three EU members
45.7
x = data not released
Source: NBR
Inflation rate
34.5
22.5
15.3
2000
2001
2002
2003
2000
<2 pp above the best
performing three EU members
x
x
x
2001
2002
2003
+ / -15 percent
x
-18.3
-23.3
-16.7
-16.8
The road towards euro-area
• Sped-up nominal convergence, but without hurting the process of
real convergence
• EU accession prospects in 2007
• ERM II entry: not too soon (3-4 years after EU accession)
• ERM II stay: as short as possible (2 years)
• Euro-area entry: when ready (5-6 years after EU accession)