NATIONAL BANK OF ROMANIA 1

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1 1

2 C O N T E N T S Achievements of the NBR in Macroeconomic Developments...4 External Sector. 16 Exchange Rate Regime Fiscal Position..27 Banking System Euro Adoption..41 2

3 Achievements of the NBR in Adoption of a new monetary policy strategy: direct inflation targeting (August 2005) Full liberalisation of capital account and full convertibility of domestic currency (September 2006) Redenomination of domestic currency (July 2005) Completion of implementation of the Electronic Payment System (October 2005) 3

4 Macroeconomic Developments 4

5 Recent Macroeconomic Developments (1) CPI inflation: Annual rate: 4.87% (Dec /Dec. 2005) 3.66% (Mar. 2007/Mar. 2006), a record low for the post-1990 period Average annual rate: 6.56% in 2006 GDP growth: 7.7% in 2006,based on increases in final consumption by 11.5% (private consumption grew 12.6%) and in investment by 16.1%; the projection for 2007 is 6.5% Current account deficit: EUR 10 bn., in 2006 up 44.8% yoy (10.3% of GDP); 90.8% covered by FDI Jan.-Feb. 2007: EUR 2 bn., up 166% yoy; 42.5% covered by FDI 5

6 Recent Macroeconomic Developments (2) Foreign Direct Investment: 2006: EUR 9.1 bn., up 72.8% yoy Jan. - Feb. 2007: EUR 0.9 bn., lowered by 27.7% yoy Fiscal balance: 2006: -1.7% of GDP; 2007 program: -2.8% of GDP; Jan. - Mar. 2007: -0.12% of projected GDP International reserves at record level (foreign currency and gold): 2006: EUR 22.9 bn.; forex reserves EUR 21.3 bn. May 2, 2007: EUR 22.9 bn.; forex reserves EUR 21.2 bn. (covering about 4.9 months of prospective goods-and-services imports) 6

7 percent Inflation Rate target (Dec./Dec.) actual (average) actual (Dec./Dec.) ±1pp 0 ±1pp ±1pp ±1pp March 2007: 3.66% (yoy) Source: National Institute of Statistics, National Bank of Romania 7

8 Inflation Forecast 7 annual percentage change 6 annual inflation rate (end of period) target band* target Inflation targets (Dec./Dec.) 2006: 5% 2007: 4% 2008: 3.8% IV I II III IV I II III *) ±1 percentage points around the (dis)inflation path Source: National Institute of Statistics; National Bank of Romania calculations 2008 IV 2009 I 8

9 Inflation Rate 30 contribution to inflation rate; percentage points market prices excluding volatile prices volatile prices administered prices Jan.02 Apr.02 Jul.02 Oct.02 Jan.03 Apr.03 Jul.03 Oct.03 Jan.04 Apr.04 Jul.04 Oct.04 Jan.05 Apr.05 Jul.05 Source: National Institute of Statistics; National Bank of Romania calculations Oct.05 Jan.06 Apr.06 Jul.06 Oct.06 Jan.07 9

10 annual percentage change Real GDP * *) forecast Source: National Institute of Statistics; National Commission of Prognosis 10

11 GDP by Source percent industry agriculture and forestry construction services others GDP Growth: 2005: 4.1% 2006: 7.7% Source: National Institute of Statistics 11

12 percent GDP by Expenditure change in stocks actual final consumption of households : 4.1% GDP Growth: 2006: 7.7% Source: National Institute of Statistics actual final consumption of general government gross fixed capital formation net exports 12

13 annual percentage change Industrial Output Source: National Institute of Statistics Jan.-Feb. 2007: 7.4% 13

14 Gross Fixed Capital Formation (GDP component) annual percentage change Source: National Institute of Statistics 14

15 annual percentage change Household Consumption (GDP component) Source: National Institute of Statistics 15

16 External Sector 16

17 percent Current Account Balance/GDP * 2004* 2005* 2006* *) including reinvested profit Source: National Institute of Statistics; National Bank of Romania 2006: provisional data 17

18 4,000 3,500 3,000 2,500 2,000 1,500 1, Trade Balance EUR million (monthly data) EUR million exports fob imports fob trade balance 4,000 3,500 3,000 2,500 2,000 1,500 1, ,000-1,500-2,000-2, Feb. In February 2007, yoy growth of exports and imports in RON was 5.9% and 23.7% respectively. Source: National Institute of Statistics -1,000-1,500 18

19 Current Account Deficit Financing via FDI EUR billion capital transfers foreign direct investment current account balance -2.5 Jan.-Feb Jan.-Feb Current account financing via FDI (including capital transfers) amounted to 45.1% in Jan.-Feb vs 167% yoy. In Jan.-Feb. 2007, net FDI lowered by 27.7% yoy. Source: National Bank of Romania, National Institute of Statistics 19

20 Foreign Trade by Group of Commodities 100% Exports Imports 100% 80% textiles, wearing apparel, footwear base metals 80% 60% mineral products 60% 40% machinery, equipment and transport means 40% 20% 0% chemical and plastic products other * * 20% 0% In January 2007, yoy growth rate of exports of machinery, equipment and transport means was 36.4%; share of imports thereof in total imports remained broadly unchanged at 37.1%. Source: National Institute of Statistics *) January 20

21 Foreign Trade by Group of Countries* Exports Imports EU-26 76% EU-26 76% other countries 10% other European countries 14% other countries 8% other European countries 16% Source: National Institute of Statistics *) January

22 Gross International Reserves Gross Official Reserves EUR billion banks' foreign exchange reserves NBR foreign exchange reserves gold EUR billion NBR foreign exchange reserves gold Feb May 2 May 2007: NBR forex reserves equalled EUR 21.2 bn. and gross official reserves EUR 22.9 bn. Source: National Bank of Romania 22

23 Public Debt Stock 40 percent of GDP (IMF methodology) percent of GDP 40 domestic public debt/gdp foreign public and publicly guaranteed debt/gdp * Source: Ministry of Public Finance, National Bank of Romania, National Institute of Statistics *) January 23

24 Exchange Rate Regime 24

25 Liberalization of International Flows 1998: Current account operations (Art. VIII of IMF Articles of Agreement) 1999: Medium- and long-term capital inflows : Capital flows with low impact on the balance of payments : Capital flows with significant impact on the real sector : Capital flows with significant impact on the balance of payments September 2006: Full convertibility of the national currency 25

26 1.5 Nominal Exchange Rate RON/EUR (daily data) Oct.05 Jan.06 Apr.06 Jul.06 Oct.06 Jan.07 2 May 07 Jan.00 Apr.00 Jul.00 Oct.00 Jan.01 Apr.01 Jul.01 Oct.01 Jan.02 Apr.02 Jul.02 Oct.02 Jan.03 Apr.03 Jul.03 Oct.03 Jan.04 Apr.04 Jul.04 Oct.04 Jan.05 Apr.05 Jul.05 NBR's decision to pursue a more flexible exchange rate Source: National Bank of Romania

27 Fiscal Position 27

28 percent General Government Deficit /GDP (IMF methodology) Source: Ministry of Public Finance, National Institute of Statistics Jan.-Mar. 2007: -0.12% of projected GDP 28

29 Banking System 29

30 Banking Sector - the Main Component of Financial System percent of GDP bank assets insurance premiums* leasing (value of contracts)* market capitalization *) estimate for 2006 Source: Bucharest Stock Exchange, Rasdaq, Insurance Supervisory Commission, Bank Leasing Association, NBR, NIS 30

31 Main Features of the Romanian Banking System *) Features 38 banks (of which 7 foreign bank branches ) Total bank assets: EUR 50.9 billion 60.3% of bank assets held by top-five banks Solvency ratio: 17.3% Shareholding Structure of Credit Institutions in Romania (% in total assets) 5.5% 5.9% Foreign entities account for the largest part of shareholding *) December % credit institutions with majority state-owned capital credit institutions with majority domestic privately-owned capital credit institutions with majority foreign capital (including foreign bank branches) 31

32 Foreign Equity Weight in the Capital of Banks in Romania Foreign Equity December 2006 Percent of total foreign capital Percent of total capital Austria Greece Netherlands Italy Hungary France Cyprus Germany Other EU countries Total EU USA Other countries EBRD IFC Total

33 Analysis Ratios for the Banking System percent percent past-due and doubtful claims / own equity (right-side scale) solvency ratio 1 (>12%) ROE (net income / total equity) Dec.98 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 Dec.05 Dec.06 Feb.07 Source: National Bank of Romania 33

34 percent investment and loans with other banks/ total assets loans granted to clients/ total attracted and borrowed sources loans granted to clients/ total assets Banking Indicators Dec.98 Dec.99 Dec.00 Source: National Bank of Romania Dec.01 Dec.02 Dec.03 Dec.04 Dec.05 Dec.06 Feb.07 34

35 Financial Intermediation* 30 percent of GDP Source: National Institute of Statistics; National Bank of Romania *) non-government credit/gdp 35

36 percent of GDP companies households foreign currency RON Financial Intermediation* Source: National Bank of Romania, National Institute of Statistics *) non-government credit/gdp 36

37 Jan.04 percent Jul.04 Jan.05 Jul.05 Inflation Rate and Interest Rates Jan.06 NBR policy rate: 7.5% starting with March 27, 2007 households (% p.a.) Source: National Bank of Romania, National Institute of Statistics Jul.06 inflation rate (percentage change against the same year-earlier period) NBR policy rate NBR average interest rate on stock of sterilization operations (% p.a.) Jan.07 Jan.04 Jul.04 Jan.05 Jul.05 Jan.06 Jul.06 inflation rate (percentage change against the same year-earlier period) percent Jan.07 average interest rate on RON-denominated loans to non-financial corporations and households (% p.a.) average interest rate on RON-denominated time deposits from non-financial corporations and

38 Short- and Medium-Term Objectives in Prudential Regulation (1) Promoting measures to expand financial intermediation based on a banking system which is modern and sound adequately regulated from a prudential perspective efficiently supervised leading to the avoidance of sectoral disequilibria and contributing to lasting macro-stability 38

39 Short- and Medium-Term Objectives in Prudential Regulation (2) Monitoring financial stability Concept: a stable financial system should be capable of ensuring efficient resource allocation, absorbing potential shocks and preventing them from having a detrimental effect on real economy Ensuring financial system stability has become an essential prerogative of the central bank, supportive of its primary objective, i.e. to ensure price stability 39

40 Short- and Medium-Term Objectives in Prudential Regulation (3) Enhancing the quality of supervision Greater involvement of credit institutions executives in risk management NBR regulations will be better tailored to the specific risk profile of each credit institution Shift to consolidated supervision requires assessment of a credit institution s financial standing based on prudential indicators calculated at a consolidated level Implementing the primary and secondary legislation approved in 2006 with a view to apply Basel II Accord starting

41 Euro Adoption 41

42 1. For Euro Adoption (1) Consolidation of low inflation (sustainable disinflation) Establishment of domestic market for long-term capital and interest rate convergence Relative stability of the RON exchange rate (amid full convertibility) around the long-term equilibrium level (sustainable exchange rate) 42

43 Euro Adoption (2) 2. ERM2 entry is planned for 2012 in order to: Provide a time period necessary for: Sustainable fulfillment of nominal convergence criteria Achievement of a satisfactory level of real convergence 3. Euro zone entry