Bancherul - BANCI / ENGLISH / GarantiBank Romania Macroeconomic Report: RON to appreciate by around 2% during 2013; more restrictions on FX lending has been enforced as of March 2013

Romania’s economy will register this year a positive, although modest growth of 1.7%, relying on investments, helped also by higher EU funds absorption - Garanti Bank, one of the most dynamic and innovating banks on the local market, estimates in the Q1 2013 edition of its Quarterly Macroeconomic Report. (See the report here, in FISIERE)

According to the quoted document, Garanti Bank’s expectations for Romania rely on a modest recovery of the agricultural production and on the potential of implementing the announced privatization plans, re-launch of infrastructural projects and increase of EU structural funds’ absorption rate, for which the bank sees strong commitments from Government.

Inflation is expected to stay in the range of 5%-6% till mid-2013, and to decelerate towards 3.9 for the end-year. Despite the recent downward revisions to Euro area growth forecast, the outlook for Romanian growth remains positive, although modest, for 2013. During Q1 2013 only minor recovery is expected. Retail sales in January 2013 (seasonally adjusted) recovered from the previous month’s contraction with 2.4% yoy growth that bodes well for the first quarter GDP. Private consumption might be boosted by higher wages in the public sector (+8% in June 2012, and 7.4% in December that resulted in around 16% yoy growth as of January 2013), although there is a downside risk on consumption coming from further layoffs in the public sector that have been announced for this year. The private sector real wages are expected to stay at the previous level, given also the higher inflation in 2013.

„For the upcoming period, further price pressure is expected to come from energy prices. The electrical energy price liberalization agreed with the IMF will start this year with 10% in July and reaching 100% liberalized prices at the end of 2017. Additionally, green energy subvention will increase electric energy prices by 8% this year”, says Rozalia Pal (pictured), chief-economist with Garanti Bank.

The strong rebound should come from both public and private investments. Based on the bank’s estimations, EU structural funds in 2013 should amount to around EUR 2.5 bn (reaching 37% absorption rate from the current 23.4%, final payments to beneficiaries) and around EUR 2 bn rural and agriculture development fund (absorption rate to increase to 80% from the current 59%).

Private investments through privatizations, estimated around EUR 1.5 bn, are expected to attract also external funds. “Still, there is a lag between attracting new capital and the launch of investment projects, so we might not see their impact on this year’s GDP figures but for sure it should contribute to sustainable growth on the longer term”, states Rozalia Pal.

Regarding country risk, the upcoming months will be critical to see whether Romania will succeed in keeping its promises, which is of crucial importance in the IMF evaluation and the overall assessment of the country in terms of structural improvements. The full completion of the targets will be evaluated in July and a possible follow-up agreement will be decided. “The possible new precautionary stand-by agreement after the finalization of the current one would be more like a safeguard for the structural reform. If the Government proved to be committed to reforms with clear results already visible in the next months, country profile would improve while the importance of IMF might lower, considering that no balance of payments support is needed at the current stage”, added Rozalia Pal.

Regarding the Monetary Policy, Garanti Bank is expecting the softening of the monetary stance to come in the following months but first relying on alternative instruments rather than key rate cut (open markets operations and minimum reserve requirements). This will see the reduction of reserve requirements in a 1-2 percentage point steps to reach 10% for RON and 15% for FX liabilities by mid 2014. Furthermore, it is expected a rate cut of 0.25 basic points at the end of this year.

Also, Garanti Bank estimates RON to appreciate by around 2% during 2013, driven by the improved country risk and the new investment alternatives. “Currency evolution will strongly depend on Romania’s ability to attract new foreign capital for its government securities and equities in state own enterprises included on the privatization list and implicitly on the success of the privatization projects”, says Rozalia Pal. “We expect the EUR/RON to stabilize at around 4.35 by the year-end and 4.25 for 2014, under the assumption that the political environment stays calm. Still, some political risk remains on the success of major governmental projects of structural reforms and on any contagion from the Euro area crisis amid less space for FX intervention of NBR”, the Chief Economist concludes.

In what lending is concerned, more restrictions on FX lending has been enforced as of March 2013, addressing companies whose revenue is not in hard currency. According to Garanti Bank report, the RON lending might become the only alternative for some clients, so the RON interest rates are receiving more weight in financing decision. Under these circumstances, the softening monetary policy would be the proper answer to stimulate both consumption and investments by re-launch of lending activity.