Romanias Central Bank Policy of Limiting
Senior lecturer Ph. D. Vechiu Camelia
Senior lecturer Ph. D. Enache Elena
Senior lecturer Ph. D. Morozan Cristian
Lecturer Assistant Candidate Marin Carmen
In 2008, the global financial crisis has generated a feeling of distrust
from investors and significantly increased their risk aversion. The size of
current account deficit, the relatively high external financing needs and the
dependence of the banks on it, the high ratio between loans in foreign
currency and deposits in foreign currency made of the Romanian economy, a
risky destination for investors.
In these conditions, since the end of 2008 and throughout 2009, the
government's economic program was focused on reducing the external
deficit in both public and private sector, on minimizing the effects of
recession, on avoiding a crisis of the exchange rate and on cooling the
inflationary pressures. Those requirements are found for 2010 and more so
as our country has achieved significant loans in severe conditions.
Supported by the global financial crisis, the evolution of the national currency
raised major problems. As in the period 2005 * 2007, inflows of foreign currency
overrated the national currency (leu) more above the level indicated by fundamental
factors of exchange rate, the reduction of the external financing and the uncertainty
caused later an undue depreciation of the national currency (leu). Despite large
foreign currency purchases made in the previous period, the National Bank of
Romania (NBR) was able only to alleviate unsustainable appreciation of the leu,
although the challenges in the banking system were strong. The sustained dynamics
of loans in foreign currency in 2004 * 2008, would create adverse effects on the
banking system in terms of rapid and excessive depreciation of the leu (Chart 1).
Chart 1
Deposits and loans in foreign currencies
population husbandry
non – financing organizations
billion lei
billion lei
deposits in foreign currency
loans in foreign currencies
loans in foreign currency
deposits in foreign currencies
net position
net position
Source: ational Bank of Romania
1
Electronic copy available at: http://ssrn.com/abstract=1549547
In this context, central bank policy about intervention on the foreign
exchange market has been targeted by the idea that a high exchange rate
volatility is harmful both for the inflation target and the strength of the real
sector and the financial one. The more so as the Romanian economy
considered a small one and with a high degree of openness is constantly
exposed to the danger of adverse capital movements in the financial markets,
particularly the currency one.
Interventions of the National Bank of Romania on the foreign exchange
market followed to avoid the excessive currency depreciation and the
impairment was linked to the progress in the current account adjustment.
Moreover, these foreign exchange interventions were also designed based
on the foreign currency reserves. Foreign exchange reserves resulting from
intervention of overappreciation period (2004 * 2008), to which were added the
amounts received from grant agreement agreed with the International Monetary
Fund, European Union and other international financial institutions, have
enabled the central bank to support national currency (leu). National Bank of
Romania considers not only the absolute value of foreign reserves, but also the
derivative indicators, meaning the foreign exchange reserve expressed in
months of goods and services imports and the ratio between foreign reserves
and short*term external debt (Chart 2).
Chart 2
Foreign exchange reserves at BR: derivative indicatives
month
Official foreign exchange – month of goods and services
import
Official foreign exchange / external debt TS (the scale on
the right)
Jan.05 Jul.05 Jan.06 Jul.06 Jan.07 Jul.07 Jan.08 Jul.08 Jan.09 Jul.09
Source: ational Bank of Romania, ational Institute of Statistics
The NBR strategy to reduce the effects of the crisis also followed the
size and the moment of foreign exchange interventions which were linked
with the control of the liquidity on money market, provided that the budget
deficit financing was made in an important measure also using amounts
received from the International Monetary Fund and the European Union. In
2
Electronic copy available at: http://ssrn.com/abstract=1549547
2009, the NBR has provided liquidity to the banks, after the period 2004 to
2008 amid liquidity excess generated by large capital inflows in the
Romanian economy, it was in the net debtor position towards the banking
system. The intervention on the currency generated by the Central Bank also
aimed at trying to avoid reversing its position of creditor to the banking
system, which would be likely to cause problems in the transmission
mechanism of the monetary policy (Chart 3).
Chart 3
Liquidity provision operations
billion lei, daily medium stock
liquidity provision operations
(repo and swap)
loan facility
Source: ational Bank of Romania
In this context, we can say that foreign currency interventions were
necessary not only to maintain the exchange rate, but also for successful
management of the liquidity in the money market (Chart 4).
Chart 4
ROMA IA
nominal exchange rate to Euro
effective exchange rate
(+) appreciation ()) depreciation
RO /EURO
index, dec. 2005=100
daily rate
annual average
Source: BCE, BRI
3
Decrease of the depreciation rate of the national currency, and hence of
inflationary pressures arising from the exchange rate channel, while with the
efforts at fiscal consolidation have allowed the Central Bank to move to
prudent easing monetary policy since the beginning of 2010 through the
following measures: The interest rate policy was reduced to 7.5% per year,
maintaining current levels of minimum reserve ratios binding applicable to
liabilities in lei and, respectively, in foreign currency of the credit
institutions (15% and 25%), strong management of the liquidity in the
banking system to strengthen the monetary policy transmission signals.
Monetary policy interest is a directed interest, giving the market tone,
but each Central Bank has its own specific set of interests and other
instruments that transmit monetary policy, and this set of tools depends on
every market specific conditions (repo rate, interest paid on deposits and
reserves, interest on short*term interbank market).
For Romania, NBR adopted a lower monetary policy interest in order to alleviate
the dispute between it and the commercial banks for crediting the real economy.
According to the commercial banks, they seek to limit risks through more
rigorous selection of clients, although statistics are not very encouraging in this
respect. Share of nonperforming loans (graded in Loss category, for which the
chances of recovery are minimal) in the loan portfolio of banks has significantly
increased, to over 9% in late 2009 versus 3.5% in 2008. Loans placed in Loss
and Doubtful categories represented 12.3% of loans granted by banks,
comparatively to 5% in 2008 and total loans of Substandard, Doubtful and Loss
categories reached 20.8% versus 10.5%.
Thus, in these conditions of timid and slow exit from the crisis, the
agreements with the European Commission and the International Monetary
Fund provided two essential elements for the Romanian economy: external
financing gap and credibility.
Now, Romania can not get from foreign banks abroad a lower interest
rate than that required by the International Monetary Fund, which is 3.5% or
that of the European Commission, of 3.14% per year. The most recent
Romanian state loan from the local banks, more than two billion lei, was
taken with an interest rate of 8.86%, while for the loan of 1.42 billion euros
in November 2009 the State agreed to pay an interest rate of 4.25% per year.
Following from the the beginning of the crisis, the evolution of the
loans made by the Romanian State we note: in 2009 the state borrowed from
banks no more than 18 billion euros, five times more than in 2008. In 2010
the state will still have to borrow about 8.3 billion euros to cover the budget
deficit of 5.9% of Gross Domestic Product, ie the difference between
spending and revenues.
4
Imports of credibility of the European Commission and the
International Monetary Fund has provided the funding of Romanian
economy, a funding positively reflected into several directions: investment
relatively higher compared to the situation where there would not have been
concluded agreements; mitigate exchange rate depreciation of the leu
according to euro and other currencies, signed the agreement in Vienna,
where banks have pledged to renew financing lines and maintain capital
adequacy rates at insurers levels.
Amid all of this external funding, adopting some political decisions
harmonized with European measures of economic recovery, represents, according
to specialists, a positive signal beginning with the third quarter of 2010.
We can not conclude without specifying that the option of the NBR to
intervene in the currency market was not unique in Central and Eastern Europe,
the regime of controlled floating of the national currency being also charged by
the other Central Banks, currency interventions of which are amplified after
onset of the global financial crisis. In these circumstances, Central Banks in
countries like Czech Republic, Poland, Hungary, which have flexible currency
rate decided against accepting an excessive depreciation of local currencies
which could create destabilizing movements, committing themselves to
intervene to combat this phenomenon.
Bibliography:
1. Isărescu, Mugur, Reflecţii economice, Romanian Academy,
Romanian Centre for Compared and Consensual Economy,
Bucharest, 2001
2. Pocan, Ioana*Mihaela, Monetary policies and the Romania’s capital
market, Economică Publishing House, Bucharest, 2008
3. *** Business Magazine nr. 262, 263/2010;
4. *** Financial Market nr. 10, 11/2009;
5. *** National Institute of Statistics;
6. *** www.bnro.ro/Occasional*Publications*3231.aspx;
7. *** www.zf.ro.
5
Senior lecturer Ph. D. Enache Elena
Senior lecturer Ph. D. Morozan Cristian
Lecturer Assistant Candidate Marin Carmen
In 2008, the global financial crisis has generated a feeling of distrust
from investors and significantly increased their risk aversion. The size of
current account deficit, the relatively high external financing needs and the
dependence of the banks on it, the high ratio between loans in foreign
currency and deposits in foreign currency made of the Romanian economy, a
risky destination for investors.
In these conditions, since the end of 2008 and throughout 2009, the
government's economic program was focused on reducing the external
deficit in both public and private sector, on minimizing the effects of
recession, on avoiding a crisis of the exchange rate and on cooling the
inflationary pressures. Those requirements are found for 2010 and more so
as our country has achieved significant loans in severe conditions.
Supported by the global financial crisis, the evolution of the national currency
raised major problems. As in the period 2005 * 2007, inflows of foreign currency
overrated the national currency (leu) more above the level indicated by fundamental
factors of exchange rate, the reduction of the external financing and the uncertainty
caused later an undue depreciation of the national currency (leu). Despite large
foreign currency purchases made in the previous period, the National Bank of
Romania (NBR) was able only to alleviate unsustainable appreciation of the leu,
although the challenges in the banking system were strong. The sustained dynamics
of loans in foreign currency in 2004 * 2008, would create adverse effects on the
banking system in terms of rapid and excessive depreciation of the leu (Chart 1).
Chart 1
Deposits and loans in foreign currencies
population husbandry
non – financing organizations
billion lei
billion lei
deposits in foreign currency
loans in foreign currencies
loans in foreign currency
deposits in foreign currencies
net position
net position
Source: ational Bank of Romania
1
Electronic copy available at: http://ssrn.com/abstract=1549547
In this context, central bank policy about intervention on the foreign
exchange market has been targeted by the idea that a high exchange rate
volatility is harmful both for the inflation target and the strength of the real
sector and the financial one. The more so as the Romanian economy
considered a small one and with a high degree of openness is constantly
exposed to the danger of adverse capital movements in the financial markets,
particularly the currency one.
Interventions of the National Bank of Romania on the foreign exchange
market followed to avoid the excessive currency depreciation and the
impairment was linked to the progress in the current account adjustment.
Moreover, these foreign exchange interventions were also designed based
on the foreign currency reserves. Foreign exchange reserves resulting from
intervention of overappreciation period (2004 * 2008), to which were added the
amounts received from grant agreement agreed with the International Monetary
Fund, European Union and other international financial institutions, have
enabled the central bank to support national currency (leu). National Bank of
Romania considers not only the absolute value of foreign reserves, but also the
derivative indicators, meaning the foreign exchange reserve expressed in
months of goods and services imports and the ratio between foreign reserves
and short*term external debt (Chart 2).
Chart 2
Foreign exchange reserves at BR: derivative indicatives
month
Official foreign exchange – month of goods and services
import
Official foreign exchange / external debt TS (the scale on
the right)
Jan.05 Jul.05 Jan.06 Jul.06 Jan.07 Jul.07 Jan.08 Jul.08 Jan.09 Jul.09
Source: ational Bank of Romania, ational Institute of Statistics
The NBR strategy to reduce the effects of the crisis also followed the
size and the moment of foreign exchange interventions which were linked
with the control of the liquidity on money market, provided that the budget
deficit financing was made in an important measure also using amounts
received from the International Monetary Fund and the European Union. In
2
Electronic copy available at: http://ssrn.com/abstract=1549547
2009, the NBR has provided liquidity to the banks, after the period 2004 to
2008 amid liquidity excess generated by large capital inflows in the
Romanian economy, it was in the net debtor position towards the banking
system. The intervention on the currency generated by the Central Bank also
aimed at trying to avoid reversing its position of creditor to the banking
system, which would be likely to cause problems in the transmission
mechanism of the monetary policy (Chart 3).
Chart 3
Liquidity provision operations
billion lei, daily medium stock
liquidity provision operations
(repo and swap)
loan facility
Source: ational Bank of Romania
In this context, we can say that foreign currency interventions were
necessary not only to maintain the exchange rate, but also for successful
management of the liquidity in the money market (Chart 4).
Chart 4
ROMA IA
nominal exchange rate to Euro
effective exchange rate
(+) appreciation ()) depreciation
RO /EURO
index, dec. 2005=100
daily rate
annual average
Source: BCE, BRI
3
Decrease of the depreciation rate of the national currency, and hence of
inflationary pressures arising from the exchange rate channel, while with the
efforts at fiscal consolidation have allowed the Central Bank to move to
prudent easing monetary policy since the beginning of 2010 through the
following measures: The interest rate policy was reduced to 7.5% per year,
maintaining current levels of minimum reserve ratios binding applicable to
liabilities in lei and, respectively, in foreign currency of the credit
institutions (15% and 25%), strong management of the liquidity in the
banking system to strengthen the monetary policy transmission signals.
Monetary policy interest is a directed interest, giving the market tone,
but each Central Bank has its own specific set of interests and other
instruments that transmit monetary policy, and this set of tools depends on
every market specific conditions (repo rate, interest paid on deposits and
reserves, interest on short*term interbank market).
For Romania, NBR adopted a lower monetary policy interest in order to alleviate
the dispute between it and the commercial banks for crediting the real economy.
According to the commercial banks, they seek to limit risks through more
rigorous selection of clients, although statistics are not very encouraging in this
respect. Share of nonperforming loans (graded in Loss category, for which the
chances of recovery are minimal) in the loan portfolio of banks has significantly
increased, to over 9% in late 2009 versus 3.5% in 2008. Loans placed in Loss
and Doubtful categories represented 12.3% of loans granted by banks,
comparatively to 5% in 2008 and total loans of Substandard, Doubtful and Loss
categories reached 20.8% versus 10.5%.
Thus, in these conditions of timid and slow exit from the crisis, the
agreements with the European Commission and the International Monetary
Fund provided two essential elements for the Romanian economy: external
financing gap and credibility.
Now, Romania can not get from foreign banks abroad a lower interest
rate than that required by the International Monetary Fund, which is 3.5% or
that of the European Commission, of 3.14% per year. The most recent
Romanian state loan from the local banks, more than two billion lei, was
taken with an interest rate of 8.86%, while for the loan of 1.42 billion euros
in November 2009 the State agreed to pay an interest rate of 4.25% per year.
Following from the the beginning of the crisis, the evolution of the
loans made by the Romanian State we note: in 2009 the state borrowed from
banks no more than 18 billion euros, five times more than in 2008. In 2010
the state will still have to borrow about 8.3 billion euros to cover the budget
deficit of 5.9% of Gross Domestic Product, ie the difference between
spending and revenues.
4
Imports of credibility of the European Commission and the
International Monetary Fund has provided the funding of Romanian
economy, a funding positively reflected into several directions: investment
relatively higher compared to the situation where there would not have been
concluded agreements; mitigate exchange rate depreciation of the leu
according to euro and other currencies, signed the agreement in Vienna,
where banks have pledged to renew financing lines and maintain capital
adequacy rates at insurers levels.
Amid all of this external funding, adopting some political decisions
harmonized with European measures of economic recovery, represents, according
to specialists, a positive signal beginning with the third quarter of 2010.
We can not conclude without specifying that the option of the NBR to
intervene in the currency market was not unique in Central and Eastern Europe,
the regime of controlled floating of the national currency being also charged by
the other Central Banks, currency interventions of which are amplified after
onset of the global financial crisis. In these circumstances, Central Banks in
countries like Czech Republic, Poland, Hungary, which have flexible currency
rate decided against accepting an excessive depreciation of local currencies
which could create destabilizing movements, committing themselves to
intervene to combat this phenomenon.
Bibliography:
1. Isărescu, Mugur, Reflecţii economice, Romanian Academy,
Romanian Centre for Compared and Consensual Economy,
Bucharest, 2001
2. Pocan, Ioana*Mihaela, Monetary policies and the Romania’s capital
market, Economică Publishing House, Bucharest, 2008
3. *** Business Magazine nr. 262, 263/2010;
4. *** Financial Market nr. 10, 11/2009;
5. *** National Institute of Statistics;
6. *** www.bnro.ro/Occasional*Publications*3231.aspx;
7. *** www.zf.ro.
5