Thursday, July 31, 2008

Romania: Consumer Finance

Oxford Business Group Latest Briefing

Domestic demand fed by consumer finance is keeping the economy's engine running at full speed. To what extent the country's appetite for consumption is sustainable in the medium term is being questioned.

According to a recent study by UniCredit Group, Romania is ranked second in Central Eastern Europe in terms of the share of consumer loans in gross domestic product (GDP). With the current level just under 15% of GDP, the consumer loan market is outranking more established financial markets such as Turkey, Czech Republic and Poland. Data published by the National Bank of Romania in April showed that the overall value of these loans had reached RL62.1bn (17.4bn euros), a 40% growth on the corresponding period in 2007.

Along with foreign direct investment, domestic demand is one of the main engines of the country's economic growth. Taking car sales as an example, around 150,000 new passenger cars have been registered during the first six months of the year. This is while rising inflation, fuel prices and a decreased demand in Spain and Italy has caused the European car market to contract by 7.9% on average. Steven Cornelis van Groningen, president and chief executive officer of Raiffeisen Bank, told OBG, "economic growth is fuelled by consumer spending, consumer confidence is high, wages are increasing and with a rate of unemployment nearing 0% in the Bucharest area, people are not worried about being unable to pay off their loans for now."

Thanks to its large market numbering 22m inhabitants - the second biggest in Central and south-eastern EU - and penetration levels still far below those in Western Europe, consumer finance in Romania is offering huge potential for the banking sector and "is likely to remain related to the strong demand for a higher living standard," according to Debora Revoltella, chief economist of UniCredit Group for Central Eastern Europe. Industry experts predict a growth of 15-20% annually, with volumes that could exceed 30bn euros by 2011.

This positive outlook, combined with stagnating demand for consumer loans in Western Europe, have turned consumer financing in Romania into a competitive business. Numerous banks in Romania's crowded financial sector (41 at present) are opening up branches and setting up various facilities to get a piece of the consumer finance pie.

One example of this is Belgium-based KBC Bank which set up a consumer finance business in April this year offering installment loans, cash loans and revolving credit cards. Other banks such as Raiffeisen Bank, Garanti Bank - the Romanian arm of Turkey's third largest bank - and UniCredit-Tiriac Bank - the domestic branch of the Unicredit Group - are focusing on attracting the retail segment through an extensive number of branches across the country.

The National Bank of Romania (BNR) has taken a cautious attitude towards these developments. In an attempt to cool down customer spending and control inflation - at 8.6% in June - it has consistently increased the key interest rate to the current level of 10%. Some industry experts predict a further rise peaking at 11% before gradually going down later this year.

Although opinions differ about its evolution in the long run, the current account deficit is causing concern for conservative analysts. Nicolaie Alexandru Chidesciuc, senior economist at ING Bank, told the local media that depreciation is likely to occur "due to the unsustainable level of the current account deficit as well as excessively lax fiscal and revenue policies." Earlier this month, BNR published statistics showing that the deficit had widened to 6.53bn euros during the first five months of the year compared to 5.88bn euros in the same period last year. Warnings from both the EU and the International Monetary Fund (IMF) to narrow the gap or risk currency instability remain unheeded. Both Fitch Ratings and Standard & Poor's have lowered their outlooks on Romania's credit rating based on the outlook of the deficit.

A third factor causing anguish for the central bank and some commercial banks is the high number of foreign-denominated loans which continue to be granted to Romanians. Although not used for consumer financing, the lion's share of mortgage financing consists of foreign credit which mainly come in euros and, to a lesser extent, Swiss Francs. They account for 55% of the total credits. Conservative analysts foresee that if the exchange rate is affected, either by depreciation of the Leu or appreciation of the foreign currency, Romanians earning their wages in the local currency will find themselves in need of savings to compensate for their increased loans.

Despite the central bank's active efforts to minimise these risks - mainly through obliging banks to maintain minimum reserve requirements - the dominant position of foreign-owned banks in Romania limits NBR's role in controlling the origin of the loans given. Commercial banks are aware of the risks and have implemented caps on foreign-dominated loans as well as keeping a close eye on their liquidity. Besides these preventative measures, some industry experts assert that consumers themselves should share the task of keeping credit under control by limiting their own spending.

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