Thursday, April 2, 2009

Romania easing of reserve rules to aid lending -analysts

By Radu Marinas and Marius Zaharia

BUCHAREST, April 1 (Reuters) - The Romanian central bank's decision to ease hard currency reserve requirements for banks could positively impact lending to the struggling economy and ease financing costs medium-term, analysts said on Wednesday.

As the global crisis deepened, Romania has turned from being the EU's fastest-growing economy and an attractive destination for foreign investors into one of its most vulnerable.

Analysts say a pick-up in borrowing would be a breath of oxygen to struggling Romanian firms as the economy is forecast to contract by 4 percent this year and foreign direct investment is to halve to around 4 billion euros.

Late on Tuesday, the bank kept the reserve ratio on leu and foreign-denominated liabilities of up to two years, but it removed its 40 percent requirement for foreign-denominated liabilities with maturities exceeding two years.

The move takes effect in May and economists say they expect further relaxation in coming months as a 20 billion euros IMF-led aid package secured last week would help recapitalise the central bank's foreign exchange reserves.

While economists predict a pick up in lending to some degree in reaction to the decision, they say recession is unavoidable as turmoil plagues manufacturing and limits consumption.

Thousands of workers have been already laid off and several top factories have announced work stoppages in recent months due mainly to plunging demand in the euro zone.

'It boosts liquidity ... It will stimulate borrowing,' said Ionut Dumitru, head of research at Raiffeisen Bank in Bucharest, who expects a more pronounced impact in 3-6 months time.

'In addition it will eliminate pressure on financing because banks would not be forced anymore to battle for resources from deposits so dramatic like until now ... I think banks would lower interest rates on deposits.'

Central bank data showed average interest rates for household and companies leu deposits with maturity over two years rose to around 15 and 12.5 percent in January from 7.7 and 3 percent respectively in January 2008.

Rates on euro deposits by non-financial corporations grew 100 basis points over the past year to 4.6 percent in January.

Analysts estimate the amount of money released into the market after the move in a wide range of 1 to 5 billion euros.

Lucian Croitoru, an adviser to the central bank governor, said he expected the sum to be 'much less than 1 billion euros'.

Economists say lending rates to both industry and households could also go down following the move.

'What is also important is that one-month money market rates already fell 1 percent after the announcement and if nothing external affects this near-term, commercial banks will reduce cost of lending,' said Rozalia Pal of UniCredit Tiriac Bank.

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