0829 Pre Zen Tare M Negritoiu RADR
Transcript of 0829 Pre Zen Tare M Negritoiu RADR
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Misu Negritoiu
CEO
ING Bank N.V. Amsterdam Bucharest
BranchSeptember 2009
Sunshine after rain?
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Romania - overview
Second largest market (21.49 million inhabitants) in Central and Eastern Europe, after Poland
Member of EU since January 2007; ERM2 entry scheduled for 2012, euro adoption for 2015.
Country rating is sub-investment grade:
- Moodys has long-term FCY debt rating at Baa3 (stable outlook)- S&P changed in October 2008 the rating to BB+ with negative outlook
- Fitch downgraded Romania in November 2008, negative outlook (rating at BB+)
- Moodys reaffirmed the Baa3 rating in March 2009
GDP of regional countries in 2008 (bn)
Croatia 47.7
Hungary 106Poland 359
Serbia 33.7
Turkey 500
Bulgaria 33.8
Czech Rep 148
Latvia 23.3
Romania 137Slovakia 64.9
Ukraine 123
Population in 2008 (millions)
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Why did the crisis started?
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SPCS-Composite-20 (%MoM) House pricesstarted falling
Falling house prices had a strong negative impact on sub-prime mortgages
Market correction started in July 2007
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Dow Jones Industrial
Lehman colapse
The market s tarts t o realiseproblems in US m ortgage market
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The 5 great crashes 1929-2009
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Global trade collapses after Lehman
Korean trade data
Korea provides the most recent trade data of a major economy. The latest July data show just a20% fall YoY. Exports are doing better to China, rather than the US or Japan.
Exports are back at US$33bn 2007 levels.
Trade fell sharply afterLehman was allowed to filefor bankruptcy and reached2004 2005 levels (in USDterms) in just four months.
Industrial sector was hitfirst given its openness
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The experience in previous global recessions
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The worst is yet to come (sorry)
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That was the presentations topic last year
Romania was impacted with a delay (about a quarter)
But this is also good for the recovery story... We should benefit (again with a lag)
GDP (%qoq, seasonally adjusted) GDP (%YoY)
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Expectations about Romanian economy in 2009
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ING Forecast
Market Consensus
The story in Romania was similar...
We were unable to escape the crisis that started in US as we live in a global economy
The large C/A deficit and dependance on foreign borrowing accentuated the downturn
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Money market rates vs key policy rate
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Interbank interest rates traded considerably above the key policy rate
NBR improved liquidity control lately
Our medium term outlook for short-term rates points mildly to the downside, but in the short run the tensionis likely to drag on if the central bank will continue to take action in the FX market
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The economy is under pain after overheating
Romanias real GDP has been growing at an average pace of about 6% per year since 2000
GDP contracted by -6.2% YoY in 1Q09 vs 2.9% in the previous quarter; 2Q09 GDP fell by 8.8% while 3Q09could post double-digit contraction.
We expect GDP to fall by close to 8% in 2009 and by 0.5% in 2010. Risks are balanced; 2010 might provide positive surprises (a growth more than 1%).
The construction and financial sectors are likely to suffer the most; industry should recover gradually.
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GDP contributions (pps)
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Putting 1Q09 and 2Q09 GDP in a regional context
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Romania 1H09 GDP contraction in annual terms seems average in the CEE region
However, when looking at changes in annual rates vs the previous quarter, Romanias contraction was oneof the sharpest in the region
This is in spite of Romanias better position than its regional peers in terms of credit to GDP ratio andexports to GDP ratio
It is heavily related to the aggressive RON protection and high interest rates at end-2008 and early 2009GDP (% YoY) Change in annual GDP rates (pps)
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Factors behind the slump
Public deficit dynamicsAverage interest on new business RON loans
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Lending activity is contracting sharply
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The sharp increase in market rates translated into higher lending rates
This exacerbated capital outflows and currency speculation and caused the bankinglending to freeze
The outlook for demand recovery is poor given that we might only see a very slowrecovery in lending towards end-2009 and/or early 2010
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Dramatic adjustment in the external gap
C/A deficit much above an equilibrium level (estimated by the IMF at 10% of GDP for 2007, about 5% of GDP inour view)
Further adjustment to be driven by the fall in domestic demand, less by the weaker RON
We look for a considerable improvement in the C/A deficit from 12.3% in 2008 to below 5% of GDP at the end of2009 (our January forecast was 5.9% of GDP)
The adjustment process just started in November 2008
So far c/a gap is fully financed by FDI; we look for a coverage of about 80% for full 2009
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Trade balance (FOB/CIF, EURm , sa data)
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Fiscal stance and yields
EDP procedure is in place for Romania (EC asked us to correct the deficit to below 3% of GDP by 2011 andimplement new measures if the IMF/EU targets will be breached)
Initially drastic cuts in spending will be required to correct this imbalance. If this is not enough, taxes may be
hiked after presidential elections.
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The crowding out effect
The consolidated budget deficit is likely to exceed the previous years deficit and the Maastricht threshold of3% of GDP. Our current 2009 forecast stands at 8.1% of GDP (ESA95) and 7.7% of GDP (IMF standards).
IMF revised the initial target as we expected; now it forecast a budget deficit of 7.3% of GDP (IMF standards).
Still a hike in some important taxes (like VAT) may be mandatory later on probably towards the end of2009/early 2010 this should have detrimental impact on consumption recovery
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Unemployment and wages
Average annual wage growth accelerated to 22.9% YoY in 2008 but we believe it may slow down sharply to 6%this year
The outlook for nominal wage growth is bleak as companies struggle to maintain positive returns in the faceshrinking demand
The public sector faces similar threats, as the poor budget execution of last year may force the government to cutwages and/or lay off employees
We see unemployment rate rising from 6.3% in July to 8.4% by year-end and above 10% in 2010.
The seasonally adjusted unemployment rate points to climbing
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Interest rates
EMEA rate cuts are still on the agenda in Romania, Hungary and Turkey due to their heavy recessions,while Poland can probably now stop the rate cutting cycle.
We assume Brazil and Indonesia are at end to their cutting cycles.
Rate hikes are looking likely in 2010.
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Romania: long-term view
Our long-term view on the Romanian economy remains bullish- foreign direct investments to resume late 2010 and in 2011
- we expect GDP to grow by 2.6% in 2011, by 5% in 2012 and by 6% in 2013.Structural and Cohesion EU funds (20bn for the period 2007-2013) and other 9bnfor agriculture offer some good prospects.We believe the CEE convergence story still holds
Financial penetration likely to continue, but at a moderate pace
Conditions for a sustainable convergence process: To deal with the growing macroeconomic imbalances with an appropriate mix of
monetary, fiscal and income policies (IMF/EU agreement should make things betterin future years for Romania as an investment opportunity).
To implement structural reforms especially in the labour market and for businessenvironment
To develop the infrastructure in general, transport infrastructure in special
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EU and Euro entry dates
Managed float vs US$Hryvnia2025+2020+2020+2015+2012+Ukraineas only legal tender in Nov-00
Deutschemark (now euro) adoptedEuro2018+2015+2015+2010+2008MontenegroDirty free-float with euro referenceDinar2018+2015+2015+2010+2009+Serbia
1.96Currency board to euroMarka2020+2017+2017+2012+2009+BosniaTightly managed float vs euroDenar2018+2015+2015+2010+2004Macedonia
Managed float vs euroLek2020+2017+2017+2012+2009+AlbaniaNOT IN NEGOTIATIONS
Free-floatLiraNo (2018+)No (2015+)No (2015+)20051987TurkeyManaged float vs euroKuna2014+2011+2011+20052003Croatia
IN NEGOTIATIONSManaged float vs euroLeu2015+2012+200720001995Romania
1.96Currency board to euroLev2013+2010+200720001995BulgariaFree-floatForint2013+2010+200419981994HungaryFree-floatZloty2012+2009+200419981994PolandFree-floatKoruna2014+2010/11+200419981996Czech Republic
0.703ERM peg to euro 1% bandsLat2013+Apr-05200420001995Latvia15.65ERM currency board to euroKroon2013+Jun-04200419981995Estonia
3.45ERM currency board to euroLitas2013+Jun-04200420001995LithuaniaEntered at 30.126Euro2009Nov-05200420001995Slovakia
Entered at 0.429Euro2008Apr-05200420001990/98MaltaEntered at 0.585Euro2008Apr-05200419981990CyprusEntered at 239.6Euro2007Jun-04200419981996Slovenia
Free-floatKrona2012+2009+199519931991SwedenN/AEuro1999Oct-96199519931992FinlandN/AEuro1999Jan-95199519931989AustriaN/AEuro1999Apr-92198619781977PortugalN/AEuro1999Jun-89198619791977SpainN/AEuro2001Mar-98198119761975Greece
Free-floatPoundUnlikely(10/90-9/92)19731961/67/71UK
7.46ERM peg to euro with 2.25% bandsKroner2011-12+Mar-7919731961/67/71DenmarkN/AEuro1999Mar-7919731961/67/72Ireland
EU MEMBERS (since 1960) and those that have completed negotiationsparity ratemembershipentrybegunapplications
CentralRegimeCurrencyEuro adoptionERMEUNegotiationsEntryKey EU and earliest possible euro adoption dates
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