Friday, February 3, 2012

F: Romania: staying ahead on rate cuts

February 2, 2012 
by Stefan Wagstyl


Romania is maintaining its record as a leader in the current bout of interest rate cuts in emerging markets. On Thursday the central bank reduced its benchmark interest rate for the third time in as many meetings, taking it down 25 basis points to a record low of 5.5 per cent. The leu barely moved, suggesting that investors have confidence in Bucharest’s approach.

The current round of reductions, which now amounts to 75 basis points, started in November, when there the September/October carnage in EMs was still fresh in the mind and it seemed that the Romanian National Bank might be taking risks with the currency. But at 4.35 to the euro, the leu is pretty much where it was when the interet rate cuts started.

The NBR took heart from the decline in inflation to 3.14 per cent in December 2011 from 7.96 percent in December 2010. It said:

This confirms the consolidation of disinflation, with the annual inflation rate reaching the target against the background of a prudent monetary policy stance, the fading-out of the first-round effect of the VAT rate hike, and of favourable trends in volatile prices, especially of food items as well as their impact on the prices of processed food products.

Looking at domestic developments, statistical indicators reveal the persistence of negative output gap despite positive dynamics in exports, industrial and farming outputs, the current account deficit staying at sustainable levels, but also a gradual recovery of credit to the private sector.

The external environment shows that uncertainties remain regarding the resolution of the Eurozone sovereign debt crisis, with impact on investors’ risk aversion, capital flow volatility, as well as on global economic developments.


Growth is slowing, like elsewhere in CEE. The European Bank for Reconstruction and Development last week cut its forecasts for the region and did not spare Romania, reducing its 2012 GDP number from 1.1 per cent to 0.8 per cent. The latest estimated growth for forecast for 2012 in south-eastern Europe is 1.0 per cent.

Moreover, Romania is coming out of the deepest recession in the region – and Romanians had been hoping for a faster recovery.

But the real fear is a sudden new crisis in the eurozone, plunging western Europe into deep recession. As the EBRD warned, a new eurozone shock could wipe 4 percentage points off CEE growth, which would plunge Romania (and many other states) back into recession.

The government is doing what it can, keeping the economy stable by signing a new precautionary IMF deal for €5bn. But its 2012 budget plan depends on 2 per cent GDP growth.

Falling interest rates may help its finances at the margin, by reducing borrowing costs. Romanian bonds have rallied this week after the government sold $1.5bn in US dollar debt. Romania sold 10-year notes at a 6.875 per cent yield, with investors bidding for almost $7 bn, the finance minister said.

If that’s a vote of confidence from international financial investors, there may be one on its way from an industrial investor too. Bloomberg reported on Thursday that Germany’s Robert Bosch, the world’s biggest car parts supplier, plans to invest about €77m ($101 m) in a new factory near Cluj-Napoca, in north western Romania. It’s close to where Nokia closed a showcase plant last year. So, a bit of good news for Cluj-Napoca to take the edge off the bad.
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