Friday, October 17, 2008

Romania: Riding out the Storm

Oxford Business Group Latest Briefing

As the one-day suspension of trading on the Bucharest Stock Exchange fuelled rumours of bankruptcy facing the country's financial system, Central Bank Governor Mugur Isarescu

Bucharest's stock exchange halted trading on October 8, after its benchmark index, the BET-C, showed a 10.68% loss from the previous day, while BET-FI, covering the five financial investment societies, had fallen by 14.64%. Bucharest Stock Exchange rules call for a suspension of trading when the index drops by more than 10%. Trading resumed on October 9.

As a result of the suspension, though meant to help the market, rating agencies and the International Monetary Fund (IMF) grew more anxious of the impact of the financial crisis on the domestic banking sector. Concerns from these parties centred around the belief that the country's high current account deficit - partly caused by buoyant consumption of imported raw materials - was making it more vulnerable to funding issues than the rest of the region. The deficit increased by 11.9% to 9.4bn euros in the first seven months of the year, and analysts expect it to hit 14% of GDP by end of the year, due to the high level of imports.

Out of the 29 registered banks, 27 depend partially on the capital of foreign-based parent-companies; a withdrawal of their funds to cover their positions at home would put the country into bankruptcy, some analysts feared. Yet, such a scenario is highly unlikely.

During a press conference on October 13, Isarescu's main message was that "under no circumstance, not legally nor pragmatically, credit lines can be withdrawn whenever those abroad fancy it". He went on to say that "lending institutions from Romania do not have exposure to subprime investments", and that Romania enjoyed some of the best liquidity levels not only in the region, but also in the world, with solvency levels exceeding the 13% EU- average.

These positive figures are the result of the Central Bank's restrictive monetary policy and strict regulations that have often exceeded the Basel II standards. For example, the level of initial capital required for the authorisation of a lending institution in Romania is double that required by the EU regulations. Another example is the level of reserve requirements on both domestic and foreign currency, which amount to 20% and 40% respectively.

However, since the deepening of the global crisis, the International Monetary Fund (IMF) recently forecast that growth will slow from 8.6% in 2008 to less than 5% in 2009. The slowdown in the growth of domestic credit is expected to bring about a slowdown in consumption and investment while outright recession in the West is expected to negatively impact Romania's exports and foreign direct investment (FDI).

In a recent analysis, Joan Hoey, senior analyst at the Economist Intelligence Unit, argues that "Romania will need to attract capital inflows in the region of 15bn euros per year to cover an equilibrium current-account deficit of around 10% of GDP and sustain real GDP growth at the level of 6% per year," said Hoey. She believes that, although the latter will be achievable, attracting 15bn euros - up from 7bn euros this year - will be more of a challenge as accessing external financing will become harder and costlier. However, on the bright side of things, she said the "Central Bank has built up strong foreign exchange reserves which will allow it to ride out a change in market sentiment in the short run".

As parliamentary elections are approaching, the Central Bank Governor's recommendation on riding out the global financial storm has been clearly put on the table; Romanian consumers are now eager to see what the new leaders of the country will have in store for them.
reaffirmed the stability of Romania's banks.

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