Romania s economic outlook Mugur Isărescu Governor Bucharest, 19 October 15 1
Contents Romania: Overview........3 Inflation...9 Growth.........17 External sector......... Fiscal policy......31 Monetary policy......38 Banking sector.......7 Impact of regional tensions........ 5
Romania: Overview 3
Macroeconomic snapshot 15 the fifth year in a row with positive economic growth After GDP dynamics of.8% in 1, current forecasts for 15 cluster around 3.5%, again well above EU average growth The output loss incurred in 9 and 1 has been made up for The growth outlook is favourable, yet growth sustainability is conditional upon preserving macroeconomic equilibria
Macroeconomic snapshot () Inflation rate declined in recent years, reaching record lows in 15 The average annual HICP inflation rate (.% in September) is compliant with the specific Maastricht criterion The current account deficit is expected to remain below 1.% of GDP in 15, well under the MIP scoreboard benchmark (%) International reserves remain at a comfortable level despite the almost full repayment of the IMF loan 5
Macroeconomic snapshot (3) Excessive general government deficit corrected as of 1 The MTO of 1% of GDP structural deficit has been reached in 1, thus complying with the provisions of the preventive arm of the Stability and Growth Pact A significant deviation from the MTO looks likely in the coming years given forthcoming tax cuts and wage increases in the public sector Despite growing rapidly during the crisis years, the public debt to GDP ratio remains below % of GDP (the th lowest in the EU) 6
The banking system is resilient to shocks High capital adequacy indicators (comfortably above the 8% threshold) Adequate liquidity Decreasing NPL ratio amid intensified balance sheet clean up Solid provisioning of NPLs Exposure to Greek banking system is limited Macroeconomic snapshot () The four banks with Greek capital in Romania are not branches, but subsidiaries (subject to NBR direct supervision) These banks are well capitalised 7
No severe systemic risk Map of risks to financial stability Externally, risk generated by uncertainty surrounding global economic growth, the state of the international financial system, a possible reversal of the downward trend in interest rates worldwide and shifts in investor sentiment Domestically, the risk of returning to pro cyclical economic policies Risk of further modest dynamics of loans to non financial corporations, despite the sustainable growth potential Contagion risk from the banking sector in Greece Credit risk associated with the stock of loans, amid the widening share of domestic currency loans Risk triggered by the geopolitical situation in the Middle East, with possible consequences on the European single market severe systemic risk high systemic risk moderate systemic risk low systemic risk 8
Inflation 9
Clear disinflationary trend despite volatility induced by supply shocks 1 8 6 percent 9 Q1: higher excises on tobacco leu depreciation 1 H: VAT rate hike higher food prices, administered prices, oil prices 11 H1: higher external and local agri food prices oil price rise 1 H: weak harvest higher administered prices 13 Q1: rise in electricity price poorer food supply increase in excises Multi annual flat target:.5% ± 1pp 13 H 1 H1: good harvest lower VAT rate on bakery products 1 H: abundance of food products oil price decrease 15 5M: rise in electricity price reversing the downward trend in oil price Dec. 8 Dec. 9 Dec. 1 Dec. 11 Dec. 1 Dec. 13 15 Jun. Aug.: VAT rate reduction for food items Dec. 1 Dec. 15 Source: NIS, NBR calculations 1
Record low inflation over the last two years 7 6 5 3 percent annual inflation rate excluding VAT Multi annual flat target:.5% ± 1pp After following a broad based downward trend in 1, the annual CPI inflation rate remained below the variation band of the inflation target until June 15, when it fell sharply into negative territory due solely to extending the reduced VAT rate to all food items, non alcoholic beverages and public food services 1 1 3 annual inflation rate Sep. 13: cut in the VAT rate to 9% from % for bread, flourand bakery products Jun.15: extending the 9% VAT rate to all food items, non alcoholic beverages and public food services Jan.13 Feb.13 Mar.13 Apr.13 May.13 Jun.13 Jul.13 Aug.13 Sep.13 Oct.13 Nov.13 Dec.13 Jan.1 Feb.1 Mar.1 Apr.1 May.1 Jun.1 Jul.1 Aug.1 Sep.1 Oct.1 Nov.1 Dec.1 Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Jul.15 Aug.15 Sep.15 Oct.15 Nov.15 Dec.15 Leaving aside the VAT rate cut, a low inflation environment has been prevalent throughout 15 on account of both persistent and transitory factors: Low oil prices Still low domestic agricultural prices despite this year s poorer harvest Downward trend in inflation expectations The lingering, although narrowing, negative output gap Source: NIS, NBR 11
Annual inflation is seen returning inside the variation band of the target starting Jan. 17 as the direct influence of the pp cut in the standard VAT rate fades out 1 1 1 8 6 6 I 13 annual percentage change uncertainty interval annual CPI inflation rate (net of the VAT first round effect) annual CPI inflation rate II III IV I 1 II III IV I 15 II III IV I 16 annual percentage change Inflation target:.5% ±1 pp II III IV I 17 Note: The assessment presented above is part of the ongoing projection exercise, and thus subject to revisions, that will be included in the November 15 Inflation Report. The uncertainty interval was calculated based on the forecast errors in the NBR projections during 5 1. The magnitude of the forecast errors is positively correlated with the time horizon they refer to. Source: NIS, NBR projections and calculations II III 1 1 1 8 6 6 The annual CPI inflation rate is expected to: Post negative values until May 16 Register positive values (yet below the lower bound of the variation band) until the end of 16 Return inside the band starting 17 Q1 and remain there until the forecast horizon The projected trajectory is largely shaped by the impact of the new Tax Code provisions, such as: The two step cut in the standard VAT rate: from % to % as of 1 Jan. 16 and further to 19% as of 1 Jan. 17 The reduction in fuel excise duties as of 1 Jan. 17 1
Over most of the forecast interval, the annual inflation rate will be marked by the successive VAT rate cuts 1 annual percentage change (end of period) inflation rate inflation rate (excl. VAT) Projection 8 6 broadening the scope of the 9% reduced VAT rate to all food items, non alcoholic beverages and public food services cut in the standard VAT rate to 19% from % I 1 rise in the standard VAT rate to % from 19% II III IV I 11 II III IV I 1 II III IV I 13 cut in the VAT rate to 9% from % for bread, flour and bakery products II III IV I 1 II III IV I 15 II III IV I 16 cut in the standard VAT rate to % from % II III IV I 17 II III Source: NIS, NBR calculations and projections 13
Downward trend in inflation across the region; all non euro area NMS meet the Maastricht criterion for price stability Harmonised Index of Consumer Prices 7 average annual percentage change average annual percentage change 7 6 6 5 5 3 3 1 1 1 1 3 Euro area (18 countries) Romania BG CZ HU PL RO reference value 3 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.13 Mar.13 May.13 Jul.13 Sep.13 Nov.13 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.13 Mar.13 May.13 Jul.13 Sep.13 Nov.13 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.15 Mar.15 May.15 Jul.15 Sep.15 Source: Eurostat 1
Romania fulfils all the nominal convergence criteria Maastricht Criteria (Nominal Convergence Indicators) Nominal Convergence Indicators Maastricht Criteria Romania Fulfilment of the criteria Inflation rate (HICP) 1.5 pp above.6% (average of the three. (percent, annual average) best performing Member States*) (September 15) Long term interest rates pp above.% (average of the three 3.5 (percent per annum, annual average) best performing Member States in terms (September 15) of price stability*) Exchange rate (vs. euro)** (percentage change) Yes Yes ±15 percent +1.8/ 1.8 Yes General government deficit*** (percent of GDP) Government debt*** (percent of GDP) *) Lithuania, Poland, Spain. below 3 percent 1.5 Yes below 6 percent 39.9 Yes **) Maximum percentage deviations of the bilateral exchange rate against the euro from its September 13 average level in October 13 to September 15 based on daily data at business frequency. An upward/downward deviation implies that the currency was stronger/weaker than the average exchange rate in September 13. ***) 1; ESA1 methodology. Source: Eurostat 15
and observes 1 out of the 11 reference values in the scoreboard Macroeconomic Imbalance Procedure Scoreboard* Current account balance Net international investment position Real effective exchange rate (based on HICP) Share of world exports of goods and services Nominal unit labour cost index House price index Private debt Private credit flow Public sector debt Unemployment rate Financial sector liabilities (nonconsolidated) Bulgaria Croatia Czech Republic Hungary Poland Romania % of GDP 3 year average % of GDP %/+6% 35% 3 years % change ±5% (EA) ±11% (non EA) 5 years % change 6% 3 years % change +9% (EA) +1% (non EA) 1 year % change % of GDP % of GDP % of GDP % 3 years average 1 year % change 6% 133% 1% 6% 1% 16.5% 13.8 75. 1.. 15.3. 13. 7.3 18.3 1..3 1.9 7..6 6.7 1.5 1.5 1.3.3 7.6 1. 7. 13.1 88.5..7 3. 18.1 119.5.6 8.6 15.7 3. 1. 88.6.9 18 5.9. 1.6.3 85. 16.9.9 13 1. 1.5 3.1 8.9..7 7.1. 5. 6.9 11.3 1.5 35.6 1. 5. 3.8 1.8 7.7 1.8.6 6.7. 13. 8.1.. 6.3.6 95. 1.1 77.3 1.7 1. 1.7 73.8 7. 1.9 6.7 3.1 91.3.5 76.9 9.6 8.5 13 3. 68.7.3.3 3.7. 75. 3. 55.7 1. 7. 1.3 67. 1.3.8 1. 77.5.8 5.1 9.8.7 13 3. 61.7.3 1.8 3.9 3.8 66.6 1.5 38. 7. 3. 1. 57. 1.1 1.5.3 3.6 6.6. 39.9 6.9.7 *) last update: 13 October 15 not available Source: Eurostat, NIS, NBR 16
Growth 17
Romania s GDP made up entirely for the output loss incurred after the outbreak of the global financial crisis 1 annual percentage change, gross data RON billion, 8 prices (s.a.) 138 8 8.1 6.9 8.5 13. 3.5.8 16.8 1.1.6 1 15 H1/1 H1: +3.8% (provisional data) 11 7.1 8 18 5 6 7 8 9 1 11 1 13 1 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 8 9 1 11 1 13 1 15 Source: National Institute of Statistics, National Bank of Romania 18
The output gap is closing rapidly on the back of consumer demand 1 Output gap % against potential GDP Forecast GDP and domestic demand components index, 8=1, s.a.; % 15 1 95 9 Based on the most recent data, the output gap will turn positive in 16 H 85 1 GDP final consumption gross fixed capital formation 8 75 7 65 The room for further stimulating consumer demand is very limited 3 6 55 I II III IV I II III IV I II III IV I II III IV 1 15 16 17 5 8 9 1 11 1 13 1 15 H1 Source:NIS, NBR calculations 19
Drivers of GDP recovery 15 percentage points annual percentage change 15 1 5 1 5 Economic recovery after 1 was initially driven by net exports 5 1 15 final consumption gross fixed capital formation net exports change in inventories GDP (rhs) 5 1 15 Since 1, domestic demand has replaced net exports as growth driver due to a pick up in final consumption and a recent rebound in gross fixed capital formation 5 8 9 1 11 1 13 1 15 Source: NIS H1 5
Exports of goods returned to the growth trend recorded before the outbreak of the crisis, posting robust increases in the last five and a half years 1 share in exports, % 1 percent =1 35 9 8 8 annual percentage change index (rhs) 3 7 6 5 6 5 Iron and steel Telecom equipment Rubber Petrochemical products 3 Industrial machinery Textiles and footwear 15 Electrical equipment 1 1 Motor vehicles 5 1 3 Source: Eurostat 5 6 7 8 9 1 11 1 13 1 15H1 1 3 5 6 7 8 9 1 11 1 13 1 15H1 1
Fast growth rates in the electrical equipment and automotive sectors have been the largest contributors to the favourable performance of industry 16 annual percentage change index 5=1, s. a. manufacturing 1 8 9.3 1.3 industrial production 7.8 7.5 6.1 5.5 electrical equipment automotive industry 35 3.7.7..9 5 3.1 15 5.5 8 1 5 6 7 8 9 1 11 1 13 1 15* 5 6 7 8 9 1 11 1 13 1 15* *) Jan. Aug. Source: NIS
Lately, IT&C services have emerged as a new star sector of the economy 9 8 7 percent of GDP annual percentage change, s.a. 18 16 1 The share of IT&C in total GDP has exceeded that of agricultural sector since 1 and is currently close to the share of construction 6 5 3 1.9.5....9 8 9 1 11 1 13 5.9 1 7. 15 H1 Q1 Q Q3 Q Q1 Q Q3 Q Q1 Q 13 1 15 1 1 8 6 The sector accounts now for more than % of the surplus of trade in services (from around 3% in 5) Development of the sector is supported by a lower labour tax wedge Employees of IT&C companies are exempt from paying income taxes on wages, provided that the firm has a turnover of over USD 1, per employee Source: NIS 3
External sector
Significant adjustment of the external imbalance The current account deficit narrowed markedly from a peak of 13.% of GDP in 7 to.5% in 9, driven by the private sector and supported by fiscal consolidation After hovering around % of GDP in the following three years, the current account deficit further fell to 1.1% of GDP in 13 amid The trade deficit narrowing by 3.9% yoy The larger services surplus, prompted particularly by receipts from transport services (in correlation with higher exports of goods) Current account performance further improved in 1 (deficit of.5% of GDP) and came close to balance in 15 H1 (.% of GDP) Projections for 15 point to a deficit below 1% of GDP (slight widening, in line with growing domestic demand) At end September 15, international reserves stood at EUR 3.5 bn (out of which EUR 9.1 bn forex), covering about 6 months of prospective goods and services imports 5
Virtually balanced current account in Jan. Aug. 15, with the services surplus offsetting the slight widening in the balance of trade in goods 1 EUR billion EUR billion 6 5 5 1 15 5 8 9 1 primary income secondary income services trade balance current account balance 11 1 13 1 Jan. Aug. 1 Primary income: mainly interest income, dividends, reinvested earnings, labour income, EU subsidies primary income secondary income services trade balance current account balance Secondary income: current transfers (private and non investment European funds, contributions to the EU budget) Jan. Aug. 15 - - -6-8 -1 Source: National Institute of Statistics, National Bank of Romania 6
Export performance remains robust, however price competitiveness may be hampered by recent and forthcoming wage increases, especially in low tech (labour intensive) sectors Exports of goods REER ULC in manufacturing volume index, 1=1 % 1. value index, 1=1 6 pp annual % change 6 18.9 18 NEER 16.8 16 labour cost differential 1.7 1 REER (rhs) 1.6 1 1.5 1 8. 8 total exports 6 EU8 market share (rhs).3..1. 1 11 1 13 1 15* total manufacturing motor vehicles and parts electrical equipment furniture wearing apparel and footwear 1 11 1 13 1 15* 6 6 Q1 Q Q3 Q Q1 Q Q3 Q Q1 Q 6 *) based on 15 H1 data 13 1 15 Source: Eurostat, EC 7
Decreasing external debt and comfortable level of international reserves International reserves Total external debt Official reserves adequacy 8 36 EUR billion NBR foreign exchange reserves gold 11 1 9 8 EUR billion ST debt (majority private debt) LT debt 19.5.8.9 19. 18.9.1 6 5 EUR billion international reserves IMF synthetic indicator (1 15%) 3 months of imports 1% of ST external debt (residual maturity) % of M3 3 8 7 6 5 19.9.6 15.6 3 16 1 8 3 1.6 6.3 8.6 1.6 38.7 51.9 66.7 7.1 77.1 79.9 78.9 75.8 7.5 1 5 6 7 8 9 1 * Sep.; ** Jul.; *** Jan. Jul. 11 1 13 1 15* 5 6 7 8 9 1 11 1 13 1 15** 8 9 1 11 1 13 1 15*** Source: NBR, NCP, IMF 8
35 3 5 15 1 5 Forex reserves above the pre crisis level and uptrend in NBR s net foreign assets EUR billion 7.7 7.6 9.5 6.8.6.3 9 Jan.7 Mar.7 May.7 Jul.7 Sep.7 Nov.7 Jan.8 Mar.8 May.8 Jul.8 Sep.8 Nov.8 Jan.9 Mar.9 May.9 Jul.9 Sep.9 Nov.9 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.11 Mar.11 May.11 Jul.11 Sep.11 Nov.11 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.13 Mar.13 May.13 Jul.13 Sep.13 Nov.13 Jan.1 Mar.1 May.1 Jul.1 Sep.1 Nov.1 Jan.15 Mar.15 May.15 Jul.15 Sep.15 forex reserves NBR s net foreign assets (excl. gold)
despite the IMF loan being repaid almost completely Outstanding debt to the IMF Outstanding debt to the EU and World Bank 11 1 9 8 7 6 5 3 1 SDR bn (end of period) 1.9 1.9 1.8.9 8.6 7.9 7. 5. 1.. MPF.1 NBR Remaining to be paid (principal): EUR. bn Final payment (principal): Jan. 16 1...1 1.7 5. Principal repayments on EU loan: EUR 3.5 bn Final payment (principal): May 19 1.7 1.7 1.7 3.5 3.5 3.5 1.7. 1.7 1. EUR bn (end of period) WB 1.7 1.7 1.7 EU Principal repayments on WB loan: EUR 1.7 bn Final payment (principal): Feb. 7 6 5 3 1 1.1.7 9 1 Source: NBR, MPF 11 1 13 1 Sep.15 15 16 1 Sep.15 15 16 17 18 19 1 3 3
Fiscal policy 31
Fiscal consolidation required by the preventive arm of the SGP was completed After peaking at 8.9% of GDP in 9, the public deficit was successfully brought down to just below 3% as of end 1, thus complying with the deadline under the excessive deficit procedure The deficit declined further to 1.5% of GDP in 1 and is projected to remain close to this level in 15 The structural adjustment effort amounted to a cumulative 7.7 pp of GDP during 1 1 (the second largest in the EU) and it was achieved through a mix of revenue and expenditure measures, with the latter accounting for the larger share The medium term objective set by the Fiscal Compact at 1% of GDP structural deficit was reached in 1 While the deficit in 15 is seen to remain close to the MTO, a significant deviation looks likely in the coming years given forthcoming tax cuts and wage increases in the public sector 3
Headline and structural general government balance 5 6 7 8 9 1 11 1 13 1 15f 1 3 5 6 7 8 9 1 11 general government balance (ESA1, % of GDP) structural balance (% of GDP)* MTO fiscal impulse** (rhs) * cyclically adjusted balance net of one off and temporary measures ** change in the structural primary budget balance; a negative (positive) figure indicates fiscal stimulus (tightening) Source: AMECO 3 1 1 3 Fiscal policy has recently become slightly countercyclical, yet this stance is likely to be short lived given the announced stimulative measures and the envisaged closing of the output gap during 16 33
nd largest fiscal consolidation effort in the EU; th smallest stock of public debt GR IT PT IE CY BE ES FR UK AT SI HU DE NL MT FI SK PL DK SE CZ LT LV RO BG LU EE EA EU Gross public debt percent of GDP, 1 5 1 15 *) cumulative change in cyclically adjusted net lending against 9 Source: AMECO GR RO IE ES PT PL SK LT NL DK CZ FR UK LV IT BE AT DE SI BG MT HU Fiscal consolidation during 1 1* percent of potential GDP 5 1 15 3
Net public debt ratio has been virtually stable since 1, the increase in the gross measure being due to the build up of a foreign currency buffer Public debt Foreign currency buffer of the MPF percent of GDP EUR bn. 8 35 7 3 6 5 5 15 3 1 5 1 8 9 1 11 1 13 1 15 Q1 gross public debt Source: NBR, MPF, FSA net public debt 9 1 11 1 13 1 15 Mar. foreign currency buffer of the MPF month gross financing requirements Source: MPF 35
Improved maturity profile of public debt and decreasing borrowing costs, in line with fiscal consolidation performance Average residual maturity of total public debt Public debt stock related cost relative to government debt 6 years percent 7 5 6 5 3 3 1 1 8 9 1 11 1 13 1 15 Q1 Source: NBR, MPF, FSA 8 9 1 11 1 13 1 15 Q1 36
Assessing public debt sustainability The current level of public debt is comfortable, yet relatively close to the estimated critical threshold of 5% of GDP A debt to GDP ratio above the threshold would increase the probability of recession over 5% and have a detrimental impact on borrowing conditions Maintaining the deficit within the limits set by the MTO would allow for a steady decrease in the debt to GDP ratio, however: A persistent deviation from the MTO as implied by recent policy measures would keep the public debt ratio on an upward trajectory Even assuming that the current public debt costs are kept in place and the economy grows at potential, a budget deficit of around 3% of GDP per annum would mean exceeding the public debt critical threshold within the next three years 37
Monetary policy 38
Countercyclical monetary policy both before and after the outbreak of the global crisis 5 35 percent percent p.a. reserve ratio FX reserve ratio lei monetary policy rate (rhs) 1 18 During the boom years, the NBR tightened the policy stance by increasing the reserve requirements ratios for both RON and forex liabilities 3 15 The use of the policy rate was 5 1 constrained by massive capital inflows 15 9 6 As demand pressures subsided, the NBR gradually reduced the policy rate and the reserve requirements ratios 1 5 Jan. Nov. Sep.5 Jul.6 May.7 Mar.8 Jan.9 Nov.9 Sep.1 Jul.11 May.1 Mar.13 Jan.1 Nov.1 Sep.15 3 Rapid decline in the actual and expected annual inflation rate over the last two years warranted further easing of monetary policy Source: NBR 39
Countercyclical monetary policy both before and after the outbreak of the global crisis () Given the low inflation and the still negative output gap, there may still be some room for monetary policy easing, but such a decision is conditional upon the magnitude of the fiscal stimulus Several steps towards harmonising the operational framework of monetary policy with the EU standards have been taken The NBR will continue to seek the right timing to gradually reduce reserve requirements ratios currently at 8% and 1% for lei and forex denominated liabilities respectively towards the prevalent level in the EU The interest rate corridor has been narrowed from ± pp in 8 13 to ±1.5 pp, a width close to the ±1 pp standard
Lending rate on new business neared regional levels, although with a certain lag 5 percent, 3M moving average CZ EA HU PL RO 15 1 5 Jan.15 Apr.15 Jul.15 Jan.8 Apr.8 Jul.8 Oct.8 Jan.9 Apr.9 Jul.9 Oct.9 Jan.1 Apr.1 Jul.1 Oct.1 Jan.11 Apr.11 Jul.11 Oct.11 Jan.1 Apr.1 Jul.1 Oct.1 Jan.13 Apr.13 Jul.13 Oct.13 Jan.1 Apr.1 Jul.1 Oct.1 Source: ECB, national central banks 1
... as the persistently higher inflation rate slowed the pace of the policy rate cutting cycle in Romania Annual inflation rate Policy rate percent percent 1 CZ EA HU PL RO 8 6 1 1 8 6 Jan.8 Aug.8 Mar.9 Oct.9 May.1 Dec.1 Jul.11 Feb.1 Sep.1 Apr.13 Nov.13 Jun.1 Jan.15 Aug.15 Jan.8 Jun.8 Nov.8 Apr.9 Sep.9 Feb.1 Jul.1 Dec.1 May.11 Oct.11 Mar.1 Aug.1 Jan.13 Jun.13 Nov.13 Apr.1 Sep.1 Feb.15 Jul.15 Source: ECB, national central banks
Downward path of bank interest rates to non bank clients amid the NBR's successive policy rate cuts 3 5 percent p.a., monthly average new lei denominated loans new lei denominated time deposits NBR policy rate percent p.a., monthly average new lei denominated loans to households new lei denominated loans to companies new lei denominated time deposits to households new lei denominated time deposits to companies NBR policy rate 3 5 15 15 1 1 5 5 Jan.7 Jul.7 Jan.8 Jul.8 Jan.9 Jul.9 Jan.1 Jul.1 Jan.11 Jul.11 Jan.1 Jul.1 Jan.13 Jul.13 Jan.1 Jul.1 Jan.15 Jul.15 Jan.7 Jul.7 Jan.8 Jul.8 Jan.9 Jul.9 Jan.1 Jul.1 Jan.11 Jul.11 Jan.1 Jul.1 Jan.13 Jul.13 Jan.1 Jul.1 Jan.15 Jul.15 Source: NBR 3
Steady recovery in lending to the private sector in 15, driven by lei denominated loans 8 RONbillion New loans to the private sector percent p.a. new lei denominated loans new euro denominated loans lending rate, new euro denominated loans (rhs) lending rate, new lei denominated loans (rhs) 1 1 New lei denominated loans to the private sector new mortgage loans new consumer loans new loans to non financial corporations RON billion 8 1 16 8 16 1 6 1 8 8 Q1 1 Q Q3 Q Q1 13 Q Q3 Q Q1 1 Q Q3 Q Q1 15 Q Q1 1 Q Q3 Q Q1 13 Q Q3 Q Q1 1 Q Q3 Q Q1 15 Q Source: NBR
The historical prevalence of forex loans subsided sharply in recent years 3 1 1 real annual percentage change Jan.9 Jul.9 Jan.1 Jul.1 Jan.11 Jul.11 Jan.1 Jul.1 Jan.13 Jul.13 Jan.1 Jul.1 Jan.15 Jul.15 Source: NBR Loans to the private sector, outstanding total lei forex Aug.15: 9.3% of total credit to the private sector lei RON billion forex Jan.9 Jul.9 Jan.1 Jul.1 Jan.11 Jul.11 Jan.1 Jul.1 Jan.13 Jul.13 Jan.1 Jul.1 Jan.15 Jul.15 16 1 1 1 8 6 Decline in forex credit amid: Faster (yet orderly) cross border deleveraging NBR regulations addressing unhedged borrowers, which are fully compliant with ESRB recommendations on lending in foreign currencies Changes in the governmentsupported programme for house purchases (only lei denominated credit since Aug. 13) Increased demand for lei denominated loans was prompted by historically low lending rates In the case of mortgages, interest rates on loans in lei dropped below those on loans in euro 5
Less volatile exchange rate as compared to regional peers RO CZ HU PL Source: Bloomberg 6
Banking sector 7
The banking system is sound Capital adequacy indicators percent Solvency ratio in selected EU countries percent The banking system is well capitalised, having a high capacity to absorb potential shocks 18 16 1 13 1* 18 16 1 Total capital ratio stood at 18.1% at end June 15, well above the 8% threshold set forth by the CRD IV/CRR regulatory framework 1 1 solvency ratio 1 1 High quality of own funds, as reflected by the Common Equity Tier 1 ratio of 15.6% at end June 15 8 6 Tier 1 capital ratio total capital ratio (CRD IV/CRR) Tier 1 capital ratio (CRD IV/CRR) Tier 1 capital ratio for credit risk Dec.8 Jun.9 Dec.9 Jun.1 Dec.1 Jun.11 Dec.11 Jun.1 Dec.1 Jun.13 Dec.13 Jun.1 Dec.1 Jun.15 CZ HU PL RO AT * Sep.1: AT, GR, PL Jun.1: IT Source:National Bank of Romania, International Monetary Fund (Financial Soundness Indicators, FSI Tables, April 15) GR IT NL FR RO: 18.1% in Jun.15 8 6 The NBR is exercising tight oversight of prudential indicators, with a focus on capital adequacy dynamics and banks efforts to raise additional capital No public funds have been used so far to support the banking sector The liquidity ratio (effective liquidity/required liquidity) remained adequate (1.7 in August 15) 8
Orderly deleveraging after the outbreak of the crisis, presently slowing down 36 3 8 16 1 8 Funds from parent banks* EUR billion Banking system Greek owned banks Austrian owned banks Funds from parent banks/total bank borrowings (rhs) Dec.8 Dec.9 Dec.1 Dec.11 Dec.1 Dec.13 Dec.1 Mar.15 Jun.15 Aug.15 * subordinated loans excluded Source: NBR percent 36 3 8 16 1 8 Loan to deposit ratio total lei foreign currency percent Dec.8 May.9 Oct.9 Mar.1 Aug.1 Jan.11 Jun.11 Nov.11 Apr.1 Sep.1 Feb.13 Jul.13 Dec.13 May.1 Oct.1 Mar.15 Aug.15 5 5 175 15 15 1 75 5 5 Low level of LTD ratio in the banking system as a whole, reflecting the lack of pressures from a macroprudential standpoint LTD ratio has improved markedly in recent years, reaching 9.5% in August 15 The reduction in foreign financing was offset by the substantial rise in the local deposit base, as a result of precautionary saving by both households and companies (+9.5% yoy in August 15, change in real terms) 9
Steady decrease in NPL ratio and high degree of coverage with IFRS provisions 16 1 NPL ratio % in total loan portfolio NPL coverage in selected EU countries percent 8 13 7 1* 6 5 Banks efforts to improve loan portfolio quality have strengthened starting 1 at the NBR s recommendation, based on a four step plan The removal of fully provisioned NPLs from the balance sheet Full provisioning and removal from balance sheets of loans overdue for more 8. 19. 15.3 13.9 13.9 1.8 1.8 1.6 3 1 than 36 days Full provisioning and removal from balance sheets of loans to insolvent companies Mar.1 Jun.1 Sep.1 Dec.1 Mar.15 Jun.15 Jul.15 Aug.15 CZ PL HU SI RO AT GR CY IT *) Sep.1: AT, GR, CY, PL Jun.1: IT Source: National Bank of Romania, International Monetary Fund (Financial Soundness Indicators, FSI Tables, April 15), NBR RO: 69.% in Aug.15 The conduct of an external audit of IFRS provisions on the loan portfolio outstanding at end June 1 and of collateral assessment 5
Banking sector profitability turned positive in 15 5 percent lei billion 5 15 1 5 5 1 15 net profit (rhs) ROA ROE 3 1 1 3 5 5 Dec.6 Dec.7 Dec.8 Dec.9 Dec.1 Dec.11 Dec.1 Mar.13 Jun.13 Sep.13 Dec.13 Mar.1 Jun.1 Sep.1 Dec.1 Mar.15 Jun.15 Jul.15 Aug.15 Note: Starting 1 January 1, Romanian credit institutions apply the IFRS for accounting purposes. Source: National Bank of Romania 51
Impact of regional tensions 5
Conflict between Russia and Ukraine: manageable economic risks Real sector: Energy: the share of imports from Russia is limited (around %), most of them consisting of energy products Romania is able to cover on average around 9% of its own natural gas consumption from domestic sources (1) The weight of imported natural gas further decreased to 1.8% in Jan May 15 and is expected to become negligible in 16 Romania ranks the third least imported energy dependent country in the EU (13, after Estonia and Denmark) Russian capital is present (directly or via holding companies based in other EU countries) in the iron and steel (TMK), metallurgy (ALRO Slatina ) and oil refining (Lukoil) sectors, but none of the Russian owned companies may be deemed of systemic importance Financial sector: No direct links between the Romanian banking system and those of Russia and Ukraine No Russian or Ukrainian capital in the Romanian banking system No exposure of Romanian banks to Russian or Ukrainian entities 53
Decreasing trade exposure to Russia and Ukraine Exports to Russia Exports to Ukraine Imports from Russia 6 percent percent 3 8 percent percent percent 3 6 3 1 1 1 industrial and power generating machines road vehicles 1 cork and wood manufactures cereals 1 1 6 pharmaceutical products other total export share (rhs) 11 1 13 1 15* 3 6 8 petroleum products other total export share (rhs) 11 1 13 1 15* 3 iron, steel and metalliferous ores natural gas petroleum products other total 11 1 13 1 15* 3 Source: Comext *) Jan. Jun. 5
Limited external trade exposure to Greece 16 value index, 6 = 1 Trade of goods with Greece exports market share (rhs) imports market share (rhs) exports imports percent 1 8 With a share slightly higher than 1%, Greece ranks below top 15 export destinations 1 6 The share is similar for imports 8 Vegetables and fruits, non ferrous metals and iron and steel represent the main categories all of these products have low value added and are easily substitutable 7 8 9 1 11 1 13 1 15* *) based on 15 H1 data Source: Eurostat, NBR calculations 55
Moderate share of banks with Greek capital in the Romanian banking system (August 15) The four banks with Greek capital in Romania are not branches, but subsidiaries fully incorporated under Romanian law and thus subject to NBR supervision Share capital Loans to non bank private sector Deposits from non bank private sector percent percent percent 1.3 1.7 7.7 85.7 87.3 9.3 Greek banks other Source: NBR 56
Broadly adequate levels of prudential indicators of banks with Greek capital 57