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NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 1
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 2
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 3
Summary• Eurozone performance (esp. since 2007)
as political economy reason for current spurring of interest in firmer plans for euro adoption among NMS
• Timing of euro adoption, challenges and constraints in sequencing choices
• Currency substitution (especially foreign-exchange lending) as important element of concern in policymaking (monetary policy, financial stability)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 4
Timing of Euro Adoption: Initial ConsiderationsTiming of Euro Adoption: Initial Considerations
Euro adoption as final stage of a complex convergence process, and not an initial condition of kick-starting such a process
OCA reasons: more catching-up necessary in per capita GDP; business cycle synchronization (low for Romania before 2008);
Need for diversified macroeconomic and structural policy toolbox in order to effectively manage disequilibria throughout pre-euro adoption period (w. monetary & exchange rate flexibility providing important degrees of freedom)
Importance of sustainability in evaluation of how criteria are met
No change expected in definition of convergence criteria
Sustainability considerations will necessarily involve assessments with implications on real convergence and, perhaps, also financial stability
Unilateral euro adoption not feasible and not a solution
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 5
‘Early’ Euro Adoption?Pros
More rapid expected reduction in transaction costs, exchange rate risk
Improved time consistency of macroeconomic policy mix (esp. avoidance of fiscal, wage policy relaxation)
Better incentives for timely implementation of structural reforms
Cons Low business cycle
synchronization leaves economy prone to asymmetric shocks
Loss of monetary/exchange rate flexibility leads to possibly significant macro adjustment being borne by output/employment
Significant disparities in real convergence indicators make catching-up process difficult to manage sustainably (ex. magnitude of B-S effects raising equilibrium inflation rates)
Difficulty of ex ante pinpointing (unmodified) central parity while equilibrium exchange rate may undergo substantial shifts
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 6
‘Late’ Euro Adoption?Pros
More progress in achieving nominal and real convergence
Longer time span available for tackling necessary structural adjustments
Further business cycle synchronization
Preserving monetary policy autonomy for longer
Cons Persistence of higher transaction
costs limits further financial, trade integration
Higher incentives for fiscal relaxation, delayed implementation of structural reforms
Delayed euro adoption sends unclear message to investors (domestic structural weaknesses or deliberate decision?)
As corollary of above, limits on exchange rate variations against background of full capital mobility may lead to periods of pronounced volatility in financial flows
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 7
RomaniaRomania’’s Timetable for Euro Adoption (I)s Timetable for Euro Adoption (I)
Timing of ERM2 entry is planned for 2012 in order to: provide some monetary and exchange rate flexibility (for a limited
time period) in order to further necessary and substantial structural adjustment
maintain motivation to carry out reforms in a timely manner and consolidate macro discipline (need for significant fiscal consolidation in 2010 – 2012)
provide the possibility of setting the central parity based on a more accurate estimate of the equilibrium exchange rate after overcoming both the peak in capital inflows (which remained higheven subsequent to EU accession), as well as the substantial andabrupt reduction in flows to EM after the onset of the global financial crisis
meet ex ante most of the convergence criteria and establish sustainability
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 8
RomaniaRomania’’s Timetable for Euro Adoption (II)s Timetable for Euro Adoption (II)
Timing configured to ensure ex ante likelihood of shorter necessary stay in ERM2 (min. 2 years), considering: credibility provided by final stage of the process (adoption of the euro)
and attendant spurring of adjustment possible volatile capital movements amid restricted exchange rate flexibility
during interim period the inflation targeting framework, to which exchange rate movements should be
clearly subordinated
a choice of time frame providing a balance between ambition and feasibility should serve to both anchor inflation expectations and increase the underpinnings for time consistency in macroeconomic policy
Eurozone entry is planned for January 1, 2015 (euro adoption decision expected in 2014)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 9
Limiting the Speed of Growthof Foreign-Exchange Lending
• Successful euro adoption predicated on strong domestic currency in run-up• Existence of currency substitution not problem per se in savings, but in
challenges to macroeconomic management & financial stability posed by proliferation of lending in foreign exchange
– Reasons: lower interest rates; incomplete domestic markets, shorter yield curves• NBR early on defined flexible implementation of IT as focused on
ensuring compliance with sustainable progress of disinflation along medium-term path described by announced annual inflation targets, while remaining mindful of not exacerbating existing macroeconomic vulnerabilities or creating financial stability problems whose effects might compromise durability of secured disinflation gains: ‘macroeconomic risk-management perspective’, with primacy of price stability considerations
• Also, continuous focus since 2004 on slowing down speed of growth of foreign-exchange credit (for macro as well as financial stability reasons, due to increasing asset-liability mismatches), using all available policy tools (reserve requirements, LTV, loan-to-income limits for households, exposure limits to unhedged borrowers, higher coefficients in stress tests for exposures to non-euro credit)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 10
Economic Growth in Peer Countries
-20
-15
-10
-5
0
5
10
15
20
2005
2006
2007
2008
2009
Q1
2009
Q2
2005
2006
2007
2008
2009
Q1
2009
Q2
2005
2006
2007
2008
2009
Q1
2009
Q2
2005
2006
2007
2008
2009
Q1
2009
Q2
-20
-15
-10
-5
0
5
10
15
20
net exportsgross capital formation*final consumptionGDP (rhs)
annual percentage change
Source: Eurostat
Czech Rep. Poland RomaniaHungary
contribution to annual change, pp
* including statistical discrepancy
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 11
Headline Inflation and CORE Inflation
2
3
4
5
6
7
8
9
10
Dec
.05
Feb.
06
Apr.0
6
Jun.
06
Aug.
06
Oct
.06
Dec
.06
Feb.
07
Apr.0
7
Jun.
07
Aug.
07
Oct
.07
Dec
.07
Feb.
08
Apr.0
8
Jun.
08
Aug.
08
Oct
.08
Dec
.08
Feb.
09
Apr.0
9
Jun.
09
Aug.
09
Oct
.09
annual percentage change
CPI (total)
CORE1 (CPI – administered prices)
CORE2 (CORE1 – volatile prices*)
adjusted CORE2**
Source: National Institute of Statistics, National Bank of Romania calculations
*) products with volatile prices: vegetables, fruit, eggs, fuels**) excluding tobacco and alcoholic beverages
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 12
Inflation Forecast
-1
0
1
2
3
4
5
6
7
8
9
10
I2009
II III IV I2010
II III IV I2011
II III
uncertainty interval
variation band*
4-quarter inflation rate
target
annual percentage change
-1
0
1
2
3
4
5
6
7
8
9
10
I2009
II III IV I2010
II III IV I2011
II III
variation band*
target
4-quarter inflation rate
annual percentage change
Inflation targets (Dec./Dec.) 2009: 3.5% 2010: 3.5% 2011: 3.0%
*) ±1 percentage point around the central targetSource: National Institute of Statistics, National Bank of Romania calculations
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 13
Inflation Rate and Interest Rates
0
48
1216
20
2428
32
Jan.
04M
ay.0
4Se
p.04
Jan.
05M
ay.0
5Se
p.05
Jan.
06M
ay.0
6Se
p.06
Jan.
07M
ay.0
7Se
p.07
Jan.
08M
ay.0
8Se
p.08
Jan.
09M
ay.0
9Se
p.09
Source: National Bank of Romania, National Institute of Statistics
percent
inflation rate (percentage change against the same year-earlier period)
interest rate on monetary policy operations(stock; % p.a.)
NBR policy rate (% p.a.)
04
812
1620
2428
32
Jan.
04M
ay.0
4Se
p.04
Jan.
05M
ay.0
5Se
p.05
Jan.
06M
ay.0
6Se
p.06
Jan.
07M
ay.0
7Se
p.07
Jan.
08M
ay.0
8Se
p.08
Jan.
09M
ay.0
9Se
p.09
percent
inflation rate (percentage change against the same year-earlier period)
average interest rate on lei-denominated loans to non-financial corporations and households (% p.a.)
average interest rate on lei-denominated time deposits fromnon-financial corporations and households (% p.a.)
NBR policy rate: 8.0% starting with September 30, 2009
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 14
-3.7
-5.5
-3.3
-5.8
-8.4 -8.6
-10.4
-13.5-12.3
-4.6 -4.8
2000 2001 2002 2003* 2004* 2005* 2006* 2007* 2008* 2009f* 2010f*
Current Account Balance
percent of GDP
*) including reinvested earningsSource: National Bank of Romania, National Institute of Statistics, National Commission of Prognosis
f) forecast
Jan.-Sept. 2009: EUR 3.3 bn., down 74.6% yoy
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 15
Current Account Deficit Financing via FDI
-16.7(13.5% GDP)
-16.9 (12.3% GDP)
7.0(5.7% GDP)
9.3 (6.8% GDP)
0.7(0.6% GDP)
0.6(0.4% GDP)
-25
-20
-15
-10
-5
0
5
10
2007 2008
capital transfersforeign direct investmentcurrent account balance
EUR bn.
Current account financing via FDI (including capital transfers) amounted to 58.4% in 2008 vs 46.5% in 2007. In 2008, net FDI increased 31.6% yoy.Source: National Bank of Romania, National Institute of Statistics
-13.0
-3.3
6.93.5
0.4
0.2
-15
-10
-5
0
5
10
Jan.-Sept. 2008 Jan.-Sept. 2009
capital transfers
foreign direct investment
current account balance
Current account financing via FDI (including capital transfers) amounted to 112.6% in Jan.-Sept. 2009 vs 55.7% in Jan.-Sept. 2008. In Jan.-Sept. 2009, net FDI decreased 49.4% yoy.
EUR bn.
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 16
Nominal Exchange Rate
2.7
2.9
3.1
3.3
3.5
3.7
3.9
4.1
4.3
4.5
Jan.
02
May
.02
Sep.
02
Jan.
03
May
.03
Sep.
03
Jan.
04
May
.04
Sep.
04
Jan.
05
May
.05
Sep.
05
Jan.
06
May
.06
Sep.
06
Jan.
07
May
.07
Sep.
07
Jan.
08
May
.08
Sep.
08
Jan.
09
May
.09
Sep.
09
Source: National Bank of Romania
RON/EUR (daily data)
NBR's decision to pursue a more flexible exchange rate
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 17
Real Exchange Rate of the RON against the EUR
80
100
120
140
160
180
200
220
240
260Ja
n.01
May
.01
Sep.
01Ja
n.02
May
.02
Sep.
02Ja
n.03
May
.03
Sep.
03Ja
n.04
May
.04
Sep.
04Ja
n.05
May
.05
Sep.
05Ja
n.06
May
.06
Sep.
06Ja
n.07
May
.07
Sep.
07Ja
n.08
May
.08
Sep.
08Ja
n.09
May
.09
Sep.
09
index, 2000 = 100, monthly averages
based on CPI differential between Romania and Euro area
based on PPI differential between Romania and Euro area
based on ULC in industry
Source: National Bank of Romania calculations, National Institute of Statistics, IMF - International Financial Statistics
Note: For PPI and ULC, data recalculated according to NACE Rev.2 and to the change in the base year (2005 instead of 2000) and weighting system.
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 18
100
105
110
115
120
2005 2006 2007 2008 2009*
Source: National Institute of Statistics, National Bank of Romania calculations
previous year =100
labour productivity gross real wage (based on PPI)
Real Wage and Labour Productivity in Industry
*) Jan.-Aug.
Note: Data recalculated according to NACE Rev.2 and to the change in the base year (2005 instead of 2000) and weighting system.
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 19
Source: National Bank of Romania
MLT External Debt
0.2 0.4 0.9 1.0 3.2 5.5
7.2
5.6 6.0 7.912.4
17.0
25.3
35.2
37.3
9.2 9.710.0
11.310.7
10.2
10.7
12.8
6.60.2 0
5101520253035404550556065707580
2002
2003
2004
2005
2006
2007
2008
2009
*
public and publicly guaranteed debt private debt deposits of non-residentsIMF loans
EUR billionTotal External Debt
15.0 15.9 18.324.6 28.6
38.7
51.4
62.9
1.2 2.03.2
6.3
12.5
19.8
20.6
15.3
05
101520253035404550556065707580
2002
2003
2004
2005
2006
2007
2008
2009
*
ST debt(majority private debt)
MLT debt
EUR billion
*) September
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 20
Public Debt
15.7 16.1
6.99.9
5.8
15.411.1 9.8 8.7 7.8
16.213.5
6.1
4.72.6 4.0
8.8
5.3
21.022.6
26.025.0
21.5
15.8
12.4 12.7 13.6
18.8
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f
Source: Ministry of Public Finance, National Bank of Romania, National Institute of Statistics
domestic public debt/GDP
foreign public debt/GDP
percent of GDP (according to ESA 95 methodology)
f) EDP Notification, October 2009
Note: Government securities in MFIs portfolio as share of GDP in Dec.07=1.7%, Dec.08=2.2% and Aug.09=7%
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 21
-4.4
-3.5
-2.0-1.5
-1.2 -1.2
-2.2-2.6
-5.5
-7.9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f
Source: Ministry of Public Finance, National Institute of Statistics, National Commission of Prognosis
General Government Deficit
percent of GDP(according to ESA 95 methodology)
f) EDP Notification, October 2009
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 22
0
200
400
600
800
1,000
1,200Ja
n.08
Feb.
08
Mar
.08
Apr.0
8
May
.08
Jun.
08
Jul.0
8
Aug.
08
Sep.
08
Oct
.08
Nov
.08
Dec
.08
Jan.
09
Feb.
09
Mar
.09
Apr.0
9
May
.09
Jun.
09
Jul.0
9
Aug.
09
Sep.
09
Oct
.09
Nov
.09
Romania (BB+) Czech Rep. (A)
Bulgaria (BBB-) Hungary (BBB)
Latvia (BB+) Poland (A-)
Lithuania (BBB)
Source: Bloomberg
Eurobond Spreadsbasis points
Note: The spread is calculated as against the yields on German Bunds maturing in 2012 Bond maturity: 2011 for Hungary; 2012 for Poland, Romania and Lithuania; 2013 for Bulgaria; ' ' 2014 for Czech Republic and Latvia () Composite rating (Moody's, S&P, Fitch)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 23
0
200
400
600
800
1,000
1,200
1,400
Jan.
08
Feb.
08
Mar
.08
Apr.0
8
May
.08
Jun.
08
Jul.0
8
Aug.
08
Sep.
08
Oct
.08
Nov
.08
Dec
.08
Jan.
09
Feb.
09
Mar
.09
Apr.0
9
May
.09
Jun.
09
Jul.0
9
Aug.
09
Sep.
09
Oct
.09
Nov
.09
Latvia Czech Rep. Lithuania Poland
Hungary Bulgaria Romania
Spreads of Five-year CDS for Emerging Economiesin Central and Eastern Europe
Source: Bloomberg
basis points
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 24
Debtors
15.214.612.7
21.1
25.326.8
19.9
22.724.623.4
0
5
10
15
20
25
30
35
40
45
2007Q1
Q2 Q3 Q4 2008Q1
Q2 Q3 Q4 2009Q1
Q2
loans to households
loans to non-financial corporations a.o.
percentCurrency
23.4 24.622.7
19.9
25.3
21.1
12.714.6 15.2
26.8
0
5
10
15
20
25
30
35
40
45
2007Q1
Q2 Q3 Q4 2008Q1
Q2 Q3 Q4 2009Q1
Q2
foreign-exchange-denominated loans
lei-denominated loans
percent
*) percent in quarterly GDP
Financial Intermediation*- Flows -
Source: National Institute of Statistics, National Bank of Romania
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 25
Loans to the Private Sector
Source: National Bank of Romania, National Institute of Statistics
-20
0
20
40
60
80
100
120
140
Dec
.05
Mar
.06
Jun.
06Se
p.06
Dec
.06
Mar
.07
Jun.
07Se
p.07
Dec
.07
Mar
.08
Jun.
08Se
p.08
Dec
.08
Mar
.09
Jun.
09Se
p.09
lei-denominated loanstotalforeign-exchange-denominated loans
-20
0
20
40
60
80
100
120
140
Dec
.05
Mar
.06
Jun.
06Se
p.06
Dec
.06
Mar
.07
Jun.
07Se
p.07
Dec
.07
Mar
.08
Jun.
08Se
p.08
Dec
.08
Mar
.09
Jun.
09Se
p.09
households
total
non-financial corporations & financialcorporations other than MFIs
real annual percentage change*
*) based on CPI
real annual percentage change*
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 26
Private Sector Deposits
Source: National Bank of Romania, National Institute of Statistics
(in real terms)
lei-denominated deposits
0 10 20 30 40 50 60 70 80 90
100 110
Dec
.05
Mar
.06
Jun.
06Se
p.06
Dec
.06
Mar
.07
Jun.
07Se
p.07
Dec
.07
Mar
.08
Jun.
08Se
p.08
Dec
.08
Mar
.09
Jun.
09Se
p.09
lei billion
corporations*households
(def
late
d by
CPI
,Sep
. 200
9=10
0)
0 10 20 30 40 50 60 70 80 90 100 110
Dec
.05
Mar
.06
Jun.
06Se
p.06
Dec
.06
Mar
.07
Jun.
07Se
p.07
Dec
.07
Mar
.08
Jun.
08Se
p.08
Dec
.08
Mar
.09
Jun.
09Se
p.09
lei billion
corporations*
households
foreign-exchange-denominated deposits
*) non-financial corporations and financial corporations other than MFIs