Slide 1 / 19.04.23

Romania and the international financial and

economic crisis

Ionut DUMITRU

Chief-Economist Raiffeisen Bank Romania

Slide 2 / 19.04.23

International crisis – effects on Romania

No direct effects of the subprime crisis on the Romanian economy– Banks in Romania had no direct exposure to the subprime market in the US, while

mother banks abroad had also only a very low exposure to “toxic assets”.

Important indirect effects because Romania is highly dependent on the external funding (current account deficit stood at 12.3% of GDP in 2008).

External debt and the debt of banking sector (% of GDP, 2008 Q2)

-14.5

-8.7-7.1

-5.6-4.2

-3.1-1.6

2.2

-12.7

-15.5-14.1

-6.9 -6.1-5.0

-2.5

-19.7

-13.9

-24.2

-25

-20

-15

-10

-5

0

5

LV LT EE RO BG SK HU PL CZ

Current account balance +FDIs (% of GDP)

Current account deficit (% din PIB)

Current account deficit (% of GDP, 2008 Q2)

0

20

40

60

80

100

120

140

LV EE HU BG LT SK PL RO CZ

Total external debt (% of GDP)Short-term external debt (% of GDP)Debt of banking sector (% of GDP)

Source: Eurostat, National Bank of Romania, Raiffeisen RESEARCH

Slide 3 / 19.04.23

Romania – main challenges

The crisis on the international markets and the large domestic macroeconomic disequilibria raise important challenges for the government and the central bank

Challenges in short-term– Securing external financing– Securing stability of the financial system– Dealing with the downturn in the economic activity

Challenges in long-term– Continuing the real and nominal convergence process in order to

become a member of the Euro area – Securing sustainability of the current account deficit

Slide 4 / 19.04.23

Romania – securing external financing (1) Romania was strongly affected by

the increase in risk aversion due to large macroeconomic imbalances and inappropriate economic policies (i.e. proc-cyclical fiscal policy)

– S&P and Fitch cut the country’s ratings to non-investment grade

Availability of external funding decreased rapidly in the context of an ongoing process of international deleveraging

– Foreign banks reduced additional funding to their local subsidiaries

– FDIs inflows are likely to decrease in the next period

– Foreign investors might decide to repatriate their profits

Cost of external funds increased sharply

Pressures for leu depreciation

0

100

200

300

400

500

600

700

800

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep-0

7

Nov-

07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-0

8

Nov-

08

Jan-

09

Romania Bulgaria Hungary Poland Czech Republic

5-years CDS for CEE countries

Source: Bloomberg, Raiffeisen RESEARCH

Slide 5 / 19.04.23

Romania – securing external financing (2)

Romania should ask for a multianual financial package from the European Commission, IMF and other international financial institutions (WB, EBRD, EIB).

Slide 6 / 19.04.23

Romania – Securing stability of the financial system Stability of the exchange rate is a “vital” issue for the economy

The leu was on a depreciating trend in last months, but the move was in line with developments in the other regional currencies.

Regional exchange rates

85

90

95

100

105

110

115

120

125

130

Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08

EUR/ RON EUR/ HUF

EUR/ PLN EUR/ CZK

Fixed base index, 29 December 2007=100

0

20

40

60

80

100

Latv

ia

Esto

nia

Cro

atia

Lith

uani

a

Hun

gary

Rom

ania

Pola

nd

Cze

chRe

publ

ic

Loans to companies in FCY (% of total)

Loans to households in FCY (% of total)

Loans in foreign currencies (% of total)

Source: Reuters, National Bank of Romania, Raiffeisen RESEARCH

Slide 7 / 19.04.23

Romania – dealing with the downturn in the economic activity (1)

Source: Eurostat, Raiffeisen RESEARCH

Romanian economy expanded by more than 6% per year between 2001-2007

However, economic activity would decelerate rapidly in the next quarters (with important recession risk)

– Recession from Euro area puts downward pressures on exports

– Decrease in external funding limits capacity of banks to extend lending and of companies to invest sharp deceleration of consumption and investments

Average GDP growth rate in NMS (2001-2007 )

1.82.1

3.8 4.04.5

5.66.1 6.2

7.98.5

9.1

EA

EU 2

7

HU PL CZ

BG RO SK LT EE LVReal GDP growth (% yoy)

Sep-08 Oct-08 Nov-08

Metallurgy -18.3 -25.7 -41.1

Textiles -33.0 -39.5 -34.3

Transport means (vehicles) 12.6 -3.2 -29.7

Chemicals 11.7 -6.2 -28.3

Electric appartus, machinery -16.4 -21.9 -25.3

Other transport means -11.3 -23.8 -19.7

Radio, television, optical 0.9 -10.5 -15.3

Fabricated metal products -4.3 -12.2 -12.1

Pulp and paper products -10.6 -9.4 -11.4

Worst performers in industry at the end of 2008 (% yoy)

5.7 5.1 5.2 8.5 4.2 7.9 6.2 7.1 0.51.5

2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F

Average 2001-2008 = 6.2%

Forecasts

Slide 8 / 19.04.23

Romania – dealing with the downturn in the economic activity (2)

Source: Finance Ministry, Raiffeisen RESEARCH

The large budget deficit (around 5% of GDP) and the downward pressures on the public revenues limit the capacity of government to expand public spending in order to offset the slowdown in private aggregate demand

Financing a large budget deficit is also difficult (and costly) due to the financing constraint both on the local market and on the external markets

This explains the lack of a strong anti-crisis package for the economy

At the moment, the government should concentrate more on the increase of public spending efficiency and on the increase of structural funds absorption

The government’s space of manoeuvre is limited

The central bank’s space of manoeuvre is also limited Central bank remains focused on the exchange rate

stability As a result, the stance of the monetary policy is

likely to be eased only gradually. A more coherent macroeconomic policy mix (more

restrictive Government policies) will reduce the monetary policy burden.

Consolidated budget deficit (% of GDP)

-4.9%

-5.2%-6%

-5%

-4%

-3%

-2%

-1%

0%

2003 2004 2005 2006 2007 2008E

Consolidated budget deficit (% of GDP, national methodology)

Consolidated budget deficit (% of GDP, ESA 95 methodology)

Slide 9 / 19.04.23

Romania – dealing with the downturn in the economic activity (3)

There are some mitigating factors which might help the economy to avoid a hard landing in the next period:

– Relatively lower share of credit in GDP;– The banking system is fundamentally sound and profitable;– Lower dependency on exports;– Exchange rate flexibility;– Large EU structural funds available for Romania.

Exports of goods and services in 2007 (% of GDP)

Non-government credit in 2007 (% of GDP)

0

20

40

60

80

100

RO PL Euroarea

LV LT BG SI EE CZ HU SK0

20

40

60

80

100

120

RO PL SK CZ HU LT BG EE LV EA

Source: Eurostat, ECB, Raiffeisen RESEARCH

Slide 10 / 19.04.23

Romania – Appropriate measures required to support the real convergence process Long-run economic growth potential is strong given that GDP per capita is very low The government should avoid to pursue pro-cyclical fiscal policies and it should

concentrate on investment expenditures (especially infrastructure) an absorption of structural funds;

The pattern of GDP growth should change. A more appropriate policy mix is required.

2938

42

54 55 58 60 6369 72 75

101107

110

98

8277

93

41

89

Mac

edoni

a

Bulg

aria

Rom

ani

a

Turk

ey

Pola

nd

Cro

atia

Latv

ia

Lith

uani

a

Hun

gary

Slova

kia

Esto

nia

Portug

al

Mal

ta

Cze

ch R

epub

lic

Slove

nia

Cyp

rus

Gre

ece

Italy

Spain

Euro

are

a

European Union 27 =100

GDP per capita at purchasing power parity in 2007 (% of EU 27)

Note: The dark blue lines denote the value of the indicator in 2000Source: Eurostat, Raiffeisen RESEARCH