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NATIONAL BANK OF ROMANIA
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I. 2000-2008: a period of catching-up
and growing imbalances
NATIONAL BANK OF ROMANIA
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Real GDP
25
 Steady economic growth
between 2000 and 2008
contribution to annual change, pp
annual change, %
20
net exports
change in inventories*
20
16
gross fixed capital formation
final consumption
15
12
GDP (rhs)
-10
-8
-15
-12
-20
-16
Source: NIS, NBR calculations
NATIONAL BANK OF ROMANIA
2008
-4
2007
-5
2006
0
2005
0
2004
4
2003
5
2002
8
2000
 Drivers: catching-up,
increased capital inflows due
to improved risk perception
(EU accession, NATO
membership)
10
2001
 Annual average: 5.8 percent
* including statistical discrepancy
3
Inflation rate
core inflation*
40
30
20
10
Jan.08
Jan.07
Jan.06
Jan.05
Jan.04
Jan.03
0
Jan.02
 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
headline inflation
50
Jan.01
 Since 2004, national currency
appreciation and falling external
prices channelled excess demand
pressures toward widening
current account deficit
annual percentage change
Jan.00
 Disinflation manifest for most of
the period
60
* CPI excl. administered prices, volatile prices and prices of main excisable goods
Source: National Institute of Statistics, NBR calculations
NATIONAL BANK OF ROMANIA
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Widening of current account deficit to unsustainable levels
percent of GDP
-3.3
-3.7
-5.5
-5.8
-8.4
-8.6
-10.4
-11.8
-13.5
2000
2001
2002
2003*
2004*
2005*
2006*
2007*
2008*
*) including reinvested earnings
Source: National Bank of Romania, National Institute of Statistics
NATIONAL BANK OF ROMANIA
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Significant FDI flows, but lower coverage of current account deficit
towards the end of the period
10
EUR billion
5
8.7
5.1
0
1.2
1.3
1.2
1.9
-1.5
-2.5
-1.6
-3.1
-5.1
5.2
9.3
-6.9
-5
-10
7.0
-10.2
foreign direct investment
-16.7
-16.2
2007
2008
current account balance
-15
-20
2000
2001
2002
2003
2004
2005
2006
Source: National Bank of Romania
NATIONAL BANK OF ROMANIA
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Positive correlation between trade deficit
and the flow* of loans to the private sector
16
percent of GDP
14
loans to the private sector (flow)
12
trade deficit
10
8
6
4
2
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
* 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 ROMANIA
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Fast-paced deepening of financial intermediation …
60
real annual change, percent
percent
financial intermediation*
60
loans to the private sector (rhs)
50
50
39.3
40
35.9
30
40
30
26.8
20.7
20
10
15.3
9.3
10.1
20
16.6
11.8
10
0
0
-10
-10
2000
2001
2002
2003
2004
Source: National Bank of Romania, National Institute of Statistics
2005
2006
2007
2008
*) loans to the private sector/GDP
NATIONAL BANK OF ROMANIA
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…but not as fast as in some peer countries
Average annual gains in financial intermediation*, 2000-2008
percentage points
10
8
6
4
2
Source: IMF, International Financial Statistics; National Bank of Romania
Slovenia
Slovakia
Romania
Poland
Lithuania
Latvia
Estonia
Czech
Republic
Bulgaria
-2
Hungary
0
* loans to the private sector/GDP
NATIONAL BANK OF ROMANIA
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Financial intermediation* still below region’s average in 2008
160
percent
140
63.9% region average
120
100
80
60
40
Turkey
Macedonia
Croatia
Slovenia
Slovakia
Romania
Poland
Lithuania
Latvia
Estonia
Czech
Republic
Bulgaria
Euro Area
0
Hungary
20
* loans to the private sector/GDP
Source: IMF, International Financial Statistics; National Bank of Romania
NATIONAL BANK OF ROMANIA
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Strong reliance of banks on foreign resources
Average annual growth rate of bank liabilities, 2000-2008
70
percent
60
term deposits
50
foreign liabilities
40
30
20
Slovenia
Slovakia
Romania
Poland
Lithuania
Latvia
Estonia
Czech
Republic
Bulgaria
0
Hungary
10
Source: IMF, International Financial Statistics; National Bank of Romania
NATIONAL BANK OF ROMANIA
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Rapid increase in external debt after 2004
Total external debt
80
65
MLT debt
60
80
public and publicly guaranteed
debt
private debt
75
deposits of non-residents
60
70
65
15
15
10
10
5
5
0
0
2008
20
2007
20
2006
25
2005
25
2004
30
2003
30
2002
35
2001
35
2000
40
2008
40
2007
45
2006
45
2005
50
2004
50
2003
55
2002
55
2001
 By debtor: private
debt
70
ST debt
(majority private debt)
2000
 By maturity: shortterm debt
EUR billion
EUR billion
75
Fastest components
MLT external debt
Source: National Bank of Romania
NATIONAL BANK OF ROMANIA
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General government balance
 “3 percent” SGP threshold
observed for most of the
period, but…
percent of GDP, ESA95 methodology
-2.0
 … progressive deterioration
in fiscal position since 2006,
culminating in a substantial
breach of the threshold in
2008
-1.5
-1.2
-1.2
-2.2
-2.6
-3.5
-4.4
-5.5
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Ministry of Public Finance, National Institute of Statistics
NATIONAL BANK OF ROMANIA
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Following the liberalisation of forex market in the 1990s,
the 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 ROMANIA
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Reasons for maintaining the managed float
after 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
NATIONAL BANK OF ROMANIA
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Nominal exchange rate
(daily data)
RON/EUR
1.5
2.0
2.5
NBR's decision to pursue
a more flexible exchange rate
3.0
3.5
4.0
Jan.08
Jan.07
Jan.06
Jan.05
Jan.04
Jan.03
Jan.02
Jan.01
Jan.00
4.5
Source: National Bank of Romania
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II. Impact of the global financial crisis
on the Romanian economy
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Global financial crisis: direct effects on Romania
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
NATIONAL BANK OF ROMANIA
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Global financial crisis and recession:
indirect effects on Romania (1)
Indirect effects have become manifest, their spillover 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
NATIONAL BANK OF ROMANIA
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Global financial crisis and recession:
indirect effects on Romania (2)
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
NATIONAL BANK OF ROMANIA
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Global financial crisis and recession:
indirect effects on Romania (3)
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
NATIONAL BANK OF ROMANIA
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Significant economic contraction in 2009, gradual recovery ahead
annual percentage change
7.9
7.1
6.2
4.6
4.2
0.5
-8.5
2005
2006
2007
2008
2009f
Source: National Institute of Statistics, International Monetary Fund
NATIONAL BANK OF ROMANIA
2010f
2011f
f) IMF forecast
22
Disinflation resumed in 2009 …
contribution to annual inflation rate; percentage points
10
market prices excluding volatile prices
volatile prices
8
administered prices
6
4
2
0
Oct.09
Aug.09
Jun.09
Apr.09
Feb.09
Dec.08
Oct.08
Aug.08
Jun.08
Apr.08
Feb.08
Dec.07
Oct.07
Aug.07
Jun.07
Apr.07
Feb.07
Dec.06
Oct.06
Aug.06
Jun.06
Apr.06
Feb.06
Dec.05
-2
Source: National Institute of Statistics, National Bank of Romania calculations
NATIONAL BANK OF ROMANIA
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… and it is projected to continue in 2010-2011
annual percentage change
10
uncertainty interval
9
variation band*
8
4-quarter inflation rate
7
6
target
5
4
3
2
1
Inflation targets (Dec./Dec.)
2009: 3.5%
2010: 3.5%
2011: 3.0%
I
II
III
IV
I
II
2009
2010
*) ±1 percentage point around the central target
0
-1
-2
III
IV
I
2011
II
III
Note: according to November 2009 Inflation Report
Source: National Institute of Statistics, National Bank of Romania calculations
NATIONAL BANK OF ROMANIA
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More difficult access of private sector to bank loans
real annual percentage change*
real annual percentage change*
140
120
140
lei-denominated loans
households
total
total
120
non-financial corporations & financial
corporations other than MFIs
100
foreign-currency-denominated loans
100
80
80
60
60
40
40
20
20
0
0
-20
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07
Mar.08
Jun.08
Sep.08
Dec.08
Mar.09
Jun.09
Sep.09
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07
Mar.08
Jun.08
Sep.08
Dec.08
Mar.09
Jun.09
Sep.09
-20
Source: National Bank of Romania, National Institute of Statistics
NATIONAL BANK OF ROMANIA
*) based on CPI
25
The authorities’ response (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’ response (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
NATIONAL BANK OF ROMANIA
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Policy measures taken by the NBR
before September 2008
 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 openmarket 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
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Monetary policy measures taken by the NBR
after the change in global liquidity conditions
 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
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III. Current account adjustment:
stylised facts and the case of Romania
NATIONAL BANK OF ROMANIA
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Romania: 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 ROMANIA
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Determinants of the latest synchronous cycle
 Ample liquidity on international
markets
 Low yields in advanced economies
also
triggered
the financial
crisis
 Positive economic outlook (and implicitly higher
yield expectations) in emerging economies
NATIONAL BANK OF ROMANIA
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Trajectory 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
NATIONAL BANK OF ROMANIA
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Reversal in capital flows: stylised facts
2. Real GDP
(% in GDP)
(annual change)
percent
percent
1. Current account deficit
No. of years
before LCI
-4
-3
-2
No. of years
after LCI
-1
0
1
2
No. of years
before LCI
3
4
-4
-3
3. Inflation rate
No. of years
after LCI
-2
-1
0
1
2
3
4
4. Real exchange rate
(Dec./Dec.)
percent
percent
(annual change)
appreciation
depreciation
No. of years
before LCI
-4
-3
-2
No. of years
after LCI
-1
0
1
2
No. of years
before LCI
3
4
-4
-3
-2
No. of years
after LCI
-1
0
1
2
3
4
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).
NATIONAL BANK OF ROMANIA
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Sharp adjustment in current account deficit to below 5% of GDP in 2009
percent of GDP
-4.6
-5.1
-5.3
2009f
2010f
2011f
-8.6
-10.4
-11.8
-13.5
2005
2006
2007
2008
Note: current account balance includes reinvested earnings
f) NCP forecast
Source: National Bank of Romania, National Institute of Statistics, National Commission of Prognosis
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The adjustment would have occurred
even 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 ROMANIA
36
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
NATIONAL BANK OF ROMANIA
37
The 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 ROMANIA
38
Depreciation, followed by moderate exchange rate volatility
2.7
RON/EUR
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
NATIONAL BANK OF ROMANIA
39
NBR’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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40
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
NATIONAL BANK OF ROMANIA
41
Foreign exchange reserves with the NBR:
derived indicators
10
months
times
10
official foreign exchange reserves - months of goods-and-services imports
8
official foreign exchange reserves/ST external debt (right-side scale)
8
6
6
4
4
2
2
0
Jan.05
0
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
NATIONAL BANK OF ROMANIA
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