The solutions given by The National Bank of Romania to the international financial crisis and their effect Author: Horia Mircea Botoş

The changes of macro-economical field: GDP, inflation, foreign currency rate, confidence in the financial system and fiscality

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The changes of macro-economical field: GDP, inflation, foreign currency rate, confidence in the financial system and fiscality

Romania registered a massive increase of foreign capital inputs, with the becoming of the country bordering the European Union in 2004. Current account deficit rose to 13.5% of GDP in the year 2007, then decreasing to 12.3% of GDP in 2008, all starting at 8.4% of GDP value of 2008. On the other hand, the external debt of the private sector recorded a massive increase, approximately four times, at the level of 12% in 2004 at 46% of GDP in 2008.

Financial depth of the Romanian economy in 2004 was small, only 25.6 percent. Massive inputs of capital have increased the depth, but it is still at low level standards developed economies (34.6% of GDP in 2008). Given the relatively low financial depth, the input of capital occurred rapidly and was significant.

Exchange rate appreciation has manifested both the real and in the roll. In nominal terms, from around 4.1 lei / euro in January 2004, Ron's appreciated at 3.1 lei / euro in July 2007 (appreciation of approximately 24%). Along with relatively large fiscal dominance and the net debtor position of the NBR, massive inputs of capital have raised a serious problem in the implementation of inflation targeting; monetary policy strategy adopted starting in August 2005.

Currency appreciation, favouring disinflation, reached levels that tended to affect the external competitiveness of the country. At the same time, and there were episodes of high volatility of the forex market.

As in other countries in the CEEC, the present multinational banks in the territory of Romania have received resources from the parent banks from the EMU. In 2004 almost 72% of liabilities came from the EMU. Between 2004 and 2008 the external liabilities of banks in Romania have increased by almost 7-fold, from 3.8 billion in 2004 to 24.5 billion euro’s.

Together, the increase in resources of banks and currency appreciation Ron's exuberant behaviour stimulated activity on lending in foreign currency. Credit increased a few years with rates between 60-80% per annum in real terms. The share of credit in foreign currency for the households held an appreciation of 9.4%, 2.2 points from GDP in 2004 and reaching the level of 11.6 points of GDP in 2008. For the corporate sector, these shares were 2.6 percent in 2004 and reaching the 8.5 percent of GDP that is claiming an increase of more than 3 times. Overall, financial intermediation (non-government credit in GDP) increased by 22.7 points, thus reaching 39.3 percent in 2008 from 16.6 percent in 2004.

Banks have become so dependent on external financing and imbalances in foreign assets of companies and their foreign currency liabilities have increased. In 2004, the corporate sector, the ratio of foreign currency deposits and loans in foreign currencies was approximately -5 billion, while in 2009 this difference to be reaching -35.4 billion. In the domestic users, the differences were + 5 billion in 2004 and the reaching - 30 billion in early 2009. These imbalances are one of the biggest problems the nation economy is the main channels through which external funding of any attempt to turn in the exchange rate depreciation.

All those listed above have been indirectly linked between 2005 and 2008, as anticipated moments of the phenomena of inflation and appreciation of Ron. They raise an issue for banks, mainly due to monetary regimes imposed by authorities. The growth rate required for anticipated inflation, thus inducing the intake of foreign capital in the country, which led to the appreciation rate. Constraints are strong enough to adopt binding NBR policy flotation controlled circulation of currency.

This has attracted many critics toward the policy of intervention on the forex market of the NBR, which has bought significant amounts of euro assessment to prevent the massive depreciation of the RON.

By modifying the interest rates and increasing reserve requirements by the Central Bank, the first being necessary due to appreciation of Ron's and inflationary pressure and reserves were having as mitigation for capital inputs in the country. In 2002 reserves to foreign liabilities attained a level of 20 percent, being increased at the end of 2006 to 40 points, holding it until now. But all measures taken by a National Bank managed to restrict access to foreign capital, finding the forms to avoid these obstacles.

In 2006, despite growth RMO, in foreign currency liabilities of commercial banks rose by 4.8 billion, to increase thereafter to 7.8 billion euro in 2007 and another 5.8 billion euro 2008. About three quarters of increasing liabilities of foreign banks in Romania in the period 2005-2008 has increased by RMO to 40 percent.

In response to massive inputs of capital, the central bank bought significant amounts of currency. The main reason for these purchases was that the appreciation of the relatively short periods of time was so fast that the risk of a reversing to pump-up inflation created stress in the financial sector. Many believe that these purchases were made only to alleviate appreciation. But they were made and given the reason to be careful with their action. As we will see, the end-cycle synchronous large input of capital can lead to relatively steep depreciation, which can be avoided if reserves are sufficient.

Entry of large sums of capital in the country caused a cyclical fiscal policy, which causes an increased vulnerability of the current account between 2004 and 2008. GDP has also an element of cyclonical high inputs of capital expenditure and growth with an amplification effect on them. The prospect that large inputs of capital associated with financial crisis, fiscal policies of Romania was imprudent between 2004 - 2008. In Romania were two causes for this indiscretion.

The first decision was that they considered that ‘good times’ had come once and for all, which obviously meant that expansion costs could be permanent. The second is that in 2008, costs have increased even more due to the nature of the election. Relaxation of the fiscal policy expenses has a negative effect on the economy, having as effect an involuntary decrease.

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