Transcript Main heading (blue)

Financial Markets-Economics
“Romania- Ready for lift-off?”
Florin V. Cîţu-Chief Economist
November 2006
Roadmap
• Overview of the global economy
• The Romanian economy
• Prices
• Interest Rate
• Exchange rate
• Convergence to the EUR
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Global economic health
• Strong global growth, at least in the near term
• Emerging markets seem better equiped to deal with any increase
in volatility
• Central and EE economies are growing strong
• Banks in the region are booming
• While international imbalances are widening
• And inflationary risks are intensifying
• But reactions from regionals central banks show that risks are
closly monitered
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US to slowdown while EU will grow faster
US GDP (%QoQ ann)
EU GDP (%QoQ ann)
6
3.5
5
3
2.5
4
2
1.5
3
2
1
0.5
1
0
0
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q05
US Fed funds
3Q05
1Q06
3Q06
1Q07
3Q07
3Q06
1Q07
3Q07
EBC refi rate
4
5.5
5
3
4.5
4
3.5
2
3
2.5
1
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q05
Source: ING forecasts
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3Q05
1Q06
The regional economic view
• EU enlargement has brought stronger growth
• Central and EE economies are growing strong
• Banks in the region are booming
• Romania’s underbanked economy offers the most potential for
credit growth in the near future
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Growth remains strong
Czech Republic (% YoY)
Hungary (% YoY)
10
10
8
8
6
6
4
4
2
2
0
0
2000 2001 2002 2003 2004 2005 2006F 2007F 2008F
2000 2001 2002 2003 2004 2005 2006F 2007F 2008F
Poland (% YoY)
Romania (% YoY)
10
10
8
8
6
6
4
4
2
2
0
0
2000 2001 2002 2003 2004 2005 2006F 2007F 2008F
2000 2001 2002 2003 2004 2005 2006F 2007F 2008F
Source: ING forecasts
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Increasing Indebtedness
•
Until late 1990s it was not possible for households to be indebted, but now consumers can leverage
themselves up significantly – a key factor driving economic growth in the next 5 years. For
example, in 1995 in Greece and Portugal private loans/GDP were at 34% and 75% respectively. Ten
years later this ratio reached 79% and 150%.
Lending to private sector as % of GDP
50
40
30
20
10
0
Hungary
Slovenia
Latvia
Estonia
Bulgaria
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Czech Republic
Slovakia
Poland
Romania
Romanian credit set to grow further
• With few exceptions credit has continued to grow in all EE econmies in the last 10
years. However, in Romania credit has only started to support growth in the last
couple of years, but it is likely to pick up pace in the next couple of years.
Romania
Romania
120.0%
25
RON
FX
Priv ate sector
20
100.0%
15
80.0%
10
60.0%
5
0
40.0%
-5
20.0%
-10
0.0%
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
1997
1998
1999
2000
GDP(% Y oY )
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2001
2002
2003
Priv ate Credit/GDP
2004
2005
EE experience supports RON credit growth
• Except for Czech Republic, where we saw a boom and bust scenario, all the other countries
show strong and sustaible penetration of lending into the real economy.
• In the same time of all the furture EU members Romanai is the most underbanked economy and
thus has the greatest potential to develope further.
Future EU members
Lending to the private sector as % of GDP
Lending to the private sector as % of GDP
New EU members
80
70
60
50
40
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
70
60
50
40
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Czech Republic
Estonia
Hungary
Poland
Bulgaria
Romania
Slovakia
Latvia
Ukraine
Croatia
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Turkey
Romania offers many opportunies
Lending to the private sector + Gov’t debt (2005)
(% of GDP)
300
Lending to the private sector
Government debt
250
200
150
100
50
•
Romania
Kazakhstan
Mexico
Estonia
Lithuania
Latvia
Ukraine
Russia
Czech Republic
Argentina
Slovakia
Colombia
Slovenia
Bulgaria
Poland
Chile
Brazil
India
Turkey
Hungary
Philippines
South Korea
South Africa
Croatia
Egypt
China
Greece
Germany
Italy
UK
Israel
Netherlands
US
Japan
0
Countries with the best outlook are on the right-hand side of this chart and include
former Soviet countries as well as Romania and Mexico (even accounting for
problems with IMF methodology re: Mexico’s public debt).
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After the EU entry - convergence
• EU enlargement brings stability
• Produces fast growth
• Helped by convergence funds
• FDI is attracted by cheap educated labour force, low tax rates and
prospect of EU funding improvements to infrastructure
• Romania’s relatively cheap labor and improving corruption record
bodes well for FDI prospects
• Eventual Euro adoption (2012-2014) should secure low interest rates
and eventually lower inflation
• But Romania has some way to go to fulfill the Maastricht criteria
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Convergence funds evolution
• Convergence funds have been
established that are dedicated
to the convergence trade.
Within the €100bn C4 debt
market (€50bn Poland, €30bn
Hungary, €10bn Czech
Republic and €5bn Slovakia –
vs €1bn in Romania), the bulk
had to be allocated to Poland
and Hungary. Holdings have
risen from €4bn to €35bn
since 1999.
Flow of funds into local debt markets
(€m)
50,000
45,000
Poland
Hungary
40,000
Slovakia
Czech
35,000
30,000
25,000
20,000
15,000
10,000
5,000
Dec-99
Mar-00
Jun-00
Sep-00
Dec-00
Mar-01
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
0
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Maastricht criteria-budget deficit
2006 Budget deficit forecasts ( ING)
Hungary
•EU countries in the convergence trade have
few problems funding budget deficits, perhaps
encouraging high deficits. Romania has acted
more responsibly but it shows signs that budget
deficit will grow. Although, close to the
Maastricht criteria.
Poland
Slovakia
Romania
Maastricht
0.0
-0.5
-1.0
Czech
-1.5
-2.0
Romania
-2.5
-3.0
Bulgaria
-3.5
2001
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
2002
2003
2004
2005
Budget Def icit
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2006F
2007F
Maastricht criteria-public debt
Both first and subsequent EU enlargement countries tend to have low debt (public debt,
external and internal), decreasing the risks of a financing crisis.
Here Romania looks very well, with plenty of room to increase its public debt
2005 Public debt (% of GDP) - Eurostat & ING
100
80
60
40
20
0
Romania
Czech
Bulgaria
Poland
Hungary
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Maastricht
limit
Eurozone
(2003)
Greece (2003)
Maastricht criteria-inflation
Higher inflation in second-wave countries
Interest rates should remain high for a longer period of time
It translate in more real currency appreciation
2005 average inflation
10
8
6
4
2
0
Czech
Eurozone
Poland
Maastricht
EU 25
Slovakia
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Croatia
Hungary
Bulgaria
Romania
FDI-Romania well placed to receive more
Czech/Hungary now look expensive relative to others in the region.
Poland/Slovakia remain attractive for FDI based on lower wages and high labour supply.
Romania far cheaper and has the advantage of low tax rates, but corruption is still a
problem and overall competitiveness is lower.
Wages
(EUR)
2005E
Unemployme
nt (%) Dec-05
Corp tax
Competitivene
ss (6 = best)
Per
capita
GDP
(US$)
Under or overvalued () currency vs Spain
Corruption
(10 = least
corrupt)
Czech
Republic
6.5
8.7
24
4.42
11,800
31
4.3
Hungary
7.2
7.2
16
4.38
11,600
20
5.0
Slovakia
5.1
15.5
19
4.31
9,300
23
4.3
Poland
5.4
17.6
19
4.00
7,600
33
3.4
Bulgaria
2.1
11.9
15
3.83
3,400
31
4.0
Romania
2.6
5.8
16
3.67
4,500
11
3.0
2006 rates
World Economic
Forum
ING,
2005 data
ING, PPP comparison
Sources: ING, EU Commision
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Transparency International
The bottom line
The global economy is expected to grow at a strong pace over the next 6 quarter. IMF has
revised upwards it’s world growth for 2006 and 2007
Emerging markets are well placed to grow fast because 1) bank lending will grow, 2)
government policies are better and having a positive effect 3) commodity prices are
still high, although the latest data shows that they might have peaked
Within Emerging Europe, the EU convergence story adds further lift 1) low external debt
spreads, 2) low local interest rates, 3) high FDI flows as manufacturing moves from
western Europe to new member states, and services sector expands rapidly 4) EU
cash transfers that will be 3-4% of GDP annually
Romania has the opportunity to adopt the Euro by 2012-14, and catch up with central
Europe, unless it follows the populist route of central Europe
Euro adoption in six years would support a fairly bullish view on the RON, stability in
nominal terms and appreciation in real terms.
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