BNR’s Isarescu: Romania’s macroeconomic balance has been restored. Concern remains on speculative capital flows

At an economic growth rate that tends to reach 4 percent, central bank’s concern is rather the speculative capital flows.

“(…) We have come a long way since the beginning of the crisis. Probably the most synthetic assessment of the transformation is given by the fact that, at the onset of the crisis, Romania fell short of all four Maastricht criteria – inflation, long-term interest rates, public deficit and debt, exchange rate stability –, but now they are all fully met.”, National Bank of Romania (BNR) Governor Mugur Isarescu (photo) said on Tuesday attending ‘Romania Investors Days’ conference, organized by Bucharest Stock Exchange (BVB). He assures that the macroeconomic equilibrium has been restored.

According to him, in Romania there is no danger of deflation and interest rates will not be lowered. “We have economic growth. What else do we should stimulate?” Isarescu rhetorically asked.

At the same time, BNR data show the economy resumed its growth at rates that can be regarded as robust when compared with the European performance (around 3 percent in both 2013 and 2014 and an even better 4.3 percent in the first quarter of 2015). As a consequence, the output lost in the first two years of the crisis has been completely recovered. Public debt is currently below 40 percent of GDP and looks set to decrease over the medium-term, assuming fiscal consolidation gains are maintained and the economic growth stays at current levels.

While Romania seems to have wrapped up the period of macroeconomic adjustments, the future mission of economic policies is to keep the economy on an upward trend without putting at risk the balances restored with so many efforts. As in many other European countries, the emphasis now falls on structural reforms meant to boost the economy’s growth potential in the long run, enhancing its flexibility and resilience to shocks.

“As a central banker, I am perfectly aware that one cannot talk about a sound economy and sustainable economic growth without a solid financial system. Speaking about the banking system, the soundness of which has been entrusted to the central bank, I would first say that it has successfully weathered the crisis, without any resort to public money. Not only is the system well-capitalised, as shown by the 18.6 percent total capital ratio in March 2015, but good-quality capital prevails, given that the tier 1 capital ratio stands at 16.1 percent. Both levels comfortably meet the new Basle III capital requirements. Moreover, banks made real progress in cleaning up their balance sheets over the last year, bringing the aggregate NPL ratio down from levels above 20 percent in 2014 Q1 to around 13 percent currently.”, central bank governor said.

The shift towards the domestic market in terms of financing sources was accompanied by an increase in the relative importance of local currency-denominated loans: after a long time, their share exceeded 45 percent and will possibly overtake foreign currency lending by the end of the year. “This is, undoubtedly, a positive development for both debtors, who avoid currency risk exposure, and central banks, due to the increased effectiveness of monetary policy.” Isarescu stated.

Looking ahead, the constraints on both credit supply and demand are expected to continue to prevail, BNR official argues, as the effects of a balance-sheet crisis, such as the one we have recently encountered, tend to be longer-lasting.

“In order to put the economy onto a self-sustained growth path, I believe it is necessary for banks to channel credit to productive investment, avoiding the overburdening of good debtors with the costs of past misallocations. Such an approach should generate the productivity gains that are essential for credit, investment and productivity to fuel each other and place the economy onto a sustainable uptrend.”, Isarescu pointed out. He admits the reserve requirement ratios are still high given the need to contain credit expansion, foreign currency lending in particular, during the economic boom.

BVB CEO advocates further privatization

Romania’s capital market is an extraordinary evolution process and in a process of becoming much more visible internationally and in terms of investors, Ludwik Sobolewski, the CEO of the Bucharest Stock Exchange (BVB), said in his turn.

“Our expectations when it comes to privatization should not diminish, as it remains the most important factor for developing both Romania’s capital market and the entire economy,” Sobolewski said. He pointed out that the capital market in Romania is “one of the markets with the most dynamic development.”

“I believe — and I can be accused of lack of objectivity — that Romania is now very close to this family of emerging markets. We can even say that it is at the same level as other neighbouring markets. We need to be proactive, to attract new customers and to persuade them that the products on the capital markets are good,” BVB official commented.

Which one should be restructured, listed?

The Government will continue restructuring the state-owned companies and reviewing its portfolio, to decide which of them could be listed on the stock exchange, Treasury head Stefan Nanu said attending BVB event.

“The restructuring of the state-owned companies is a three-level matter: corporate governance, inefficiency cancellation and payment of arrears. I believe that on all three levels remarkable successes were obtained. (…) The Government intends to review the entire portfolio of the state-owned companies and decide which should be restructured, which should be the object of an initial public offer (IPO) and which should be listed on the BVB,” Nanu explained.

In his opinion, the offer on the capital market for the potential investors will thus improve.

'Romania Investors DaysBucharest Stock Exchange (BVB)capital marketcapital ratiocrisiscurrency-denominated loanseconomic growthfinancial systeminitial public offer (IPO)investorsLudwik Sobolewski BVB CEOmacroeconomic balanceNational Bank of Romania Governor Mugur IsarescuNPLprivatisationspeculative capital flowsstate-owned companiesTreasury head Stefan Nanu
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