Romania's inflation rate remained at a two-year high in April as wage increases and a lending boom spurred consumption and a weaker leu increased many services prices. Inflation was an annual 8.6 percent last month, the same as in March, the National Statistics Institute INSSE said today. Consumer prices rose 0.5 percent on the month, down from a 0.7 percent month on month increase in March. 
A drought that destroyed a third of Romania's crops last year continued to pressure food prices in April while rising lending and wages prompted Romanians to shop more. The leu's decline against the euro also raised prices of services such as rent and mobile phone bills that are measured in euros. The leu has weakened 11 percent against the euro in the past year.
In March, net wages rose an annual 17.7 percent and household debt rose an annual 66 percent. 
Perhaps even more importantly Romanian producer prices continue to accelerate, and the annual rate reached 15.6% in March, which means there is plenty of evidence of "second round" effects now building up in the pipeline.
Mugur Isarescu, governor of the Banca Nationala a Romaniei, has predicted that inflation will end the year at an annual 6 percent, above the bank's inflation target of between 3 percent and 5 percent. The bank also missed its 2007 inflation target of between 4 percent and 6 percent as consumer prices increased by 6.6 percent in 2007.
The central bank raised its Monetary Policy Rate a quarter of a percentage point to 9.75 percent on May 6 to fight inflation. It has raised the rate at every policy meeting since October, when it was 7 percent. The board next meets on June 26. 
It's a little bit early to be drawing any strong conclusions here, but retail sales did slow noticeably in March - rising at an annual rate of 11.2%, down from February's 23.5% - and if we look at the chart below we could get the impression that the "great wave" may now be over. What we will now be likely to see - if what has happened in the Baltics is anything to go by - if a steady slowing in the economy, even as inflation continues to push upwards. By the look of it there may be a six to eight month lag (or slightly more) before movements in the producer price index hit the CPI.
Romania at A Glance - January 2008
Welcome to Romanian Economy Watch Blog. Below you will find the conventional chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument about the roots of Romania's emerging economic crisis which is being presented here. The data being present here is both conventional and non conventional, and reflects our in house view that demographic components need to be taken alongside more conventional macro-economic ones to appreciate growth dynamics, and in particular in the Eastern Europe context. So, alongside charts for the exchange rate and consumer debt, you will also find charts for Romanian male life expectancy, live births and fertility, out migration to Italy and Spain (based on data from ISTAT and INE) as well as quarterly GDP growth, retail sales, inflation, as well as for the trade and current account balances. Basically we hope you will find this background data useful in assessing the argument which we are presenting on this blog, namely that Romania's demography,as proxied in long term fertility and out-migration rates (there are over a million people missing from the potential labour force due to out migration alone), means that current growth rates, or anything near them, cannot be sustained without provoking continuous inflation, and loss of export competitiveness, the combination of which may well lead to severe macroeconomic consequences. Please click on thumbnails for better viewing.
To give an indication of the rate at which this problem is growing, according to data from the Romanian central bank, in October 2007 the nominal value of non-government credit advanced year-on-year by 51.4%, with a 40.5% growth in RON-denominated loans and a 63.3% rise in foreign currency-denominated loans when expressed in RON (expressed in EUR, forex loans expanded by 72.4 percent).
Next on the left there is a chart for quarterly GDP growth The Romanian economy has been growing strongly, although not excessively, in recent quarters, but what is driving this growth? On the right you can see the rapid acceleration in retail sales since the middle of this year. This expansion in domestic consumption is in part produced by a strong inflow of remittances the large number of Romanians who are now living and working abroad.
On the left you can see the number of Romanians who have residence in Italy according to ISTAT, and on the right you can see the equivalent number for Spain according to the INE. Exact figures for the total numbers of Romanians abroad are impossible to come by (which makes it impossible to calibrate anything resembling a NAIRU for Romania) for the simple reason the the Romanian authorities do not attempt to obtain an accurate measure as can be seen from the official migration statistics included in the chart on the right.
On the left are the annual numbers of live births - which is really what matters from a labour supply point of view. This has been dropping since the late 60s.Then you can see Romanian male life expectancy, which is compartively low, and this is a big complicating factor in raising participation rates among older workers to replace those who have either left or simply not been born.
2008 Forecasts:Consenus Economics are forecasting economic growth in Romania of 6.3% for 2007, and a slightly slower 5.7% for 2008. The number for 2007 seems about right, although the final reading may even be slightly higher given the governent fiscal stimulus during the second half of the year, while the number for 2008 may be rather on the high side, depending on the pace and extent of the slowdown. Really everything here hinges on whether Romania has a soft or hard landing, and when. My own feeling is that the landing will be a hard one, but the timing is very hard to foresee, and it is the timing which will have the greatest influence on the final outcome. As long as things continue as is, then the consensus forecast looks about right, but will things continue as is? The IMF in their October World Economic Outlook came in with a similar figure of 6.3% for 2007 and 6% for 2008, the Economist Intelligence Unit is forecasting growth in the 5 to 5.5% range for 2008, while the EU Commission put the figure at 5.9% in its November forecast.More interestingly the Commission sugest that this rate is achieveable without producing any significant reduction in the unemployment rate (currently officially around 7% on ILO methodology), which suggests they feel it can mainly be achieved by increasing participation rates, and redeploying labour from non productive to more productive sectors. But - as in Poland, where a large number of citizens are also known to be working abroad - it is very hard to know what credence to give the official unemployment data. Certainly a number of Romanian ministers have been very vocal in recent weeks stating that Romania has an urgent need for anywhere between 500,000 and 1 million workers.
My own view is rather more downside than all of this. A lot really depends on factors outside Romania's control, and internally the party can obviously continue for as long as it is allowed to. One limit point may well be the ability of Romanian citizens to continue contracting debt at this rate. It is noteable that despite the strong inflow of remittances and the inflow of bank funds for credit purposes the leu has been sliding. Should the appetite for credit inside Romania start to dry up, or should changed credit rules force it to, then pressure on the leu may become very strong indeed. Another limit obviously exists on the labour supply front. The IMF put Romania's growth rate at between 5 and 6% in their 2006 annual staff report, and they did this, interestingly enough, by attributing a negative (-0,2%) component to labour supply in a growth accounting study. So they are expecting the growth to come from an injection of capital and TFP. But this is where macroeconomics gets to be a funny business, since much of the growth which actually takes place in modern economies is quite labour intensive, and without that labour relative prices get out of line, and the impact of this mis-alignment is a brake on growth. So basically I would say here that the proof of the pudding is going to be in the eating. If Romania had the labour force to complement its aspirations, then I would say 6% growth would not necesssarily constitute overheating, but under the circumstances it may well do. If I have to put a number on anticipated growth in Romania next year - and that is what forcasts are all about isn't it - then I would go for something in the 3 to 3.5% range, depending on how far we are into the year before the brakes are actually slammed on. That is we may well see growth continuing during Q1 at a pace which is not much slower than the present one, but from there on in things will in all likelihood start to complicate themselves, the only real outstanding question being, I feel, how far and how fast?/p>
Monday, May 12, 2008
Romania Inflation April 2008
Wednesday, May 7, 2008
Romania Household Forex Borrowing March 2008
According to data from the Romanian central bank, household borrowing in euros continued to rise in March.
Total credit (including the coporate sector) was up by 66.3% year on year. Household borrowing in RON was up by 43% while household forex borrowing (mainly euros) was up a massive 140.3%. This latter number, large as it seems, was actually down slighly y-o-y from the 142.3 % registered in February and the peak 143.4% in January. The monthly rate of increase - 3.4% - was the lowest in at least a year, and again is well down from the 14.2% m-o-m peak hit in August 2007.
So in fact this may all now be slowing slightly, and it is not clear why, since of course euro denominated loans are not affected by the interest rate changes in the Romanian central bank. Perhaps the general expansion is losing momentum, but we need to wait and see some clearer signs in the real economy data before reaching this kind of conclusion. Certainly there may be some sort of tightening in credit conditions going on after all the IMF and other warnings. The real question is what is going to happen about the current account deficit once the borrowing which is attracting the funds to plug the whole really slows down.
In a not entirely unrelated piece of news the Romanian Statistics Office announced today that the construction production index rose in March at an annual rate of 32.9%.
Tuesday, May 6, 2008
Romania Central Bank Raises Interest Rates
Romania's central bank raised its main interest rate, already the highest in the European Union, by a quarter of a percentage point again today after inflation accelerated to a two-year high. The central bank raised the rate to 9.75 percent from 9.5 percent, effective from tomorrow.
The Banca Nationala a Romaniei has raised its Monetary Policy rate at every meeting since October, when it was 7 percent, as rising global food and fuel prices and a weaker currency spurred inflation, which accelerated to 8.6 percent in March.
The central bank board today also left its minimum reserve requirements on commercial bank deposits at 40 percent for foreign-exchange deposits and 20 percent for deposits in lei. It also set its next rate decision date for June 26.
``Annual inflation is likely to temporarily remain above the upper limit of the variation band around the target in the following months,'' the central bank said in a separate e-mailed statement today. Inflation pressure in recent months stemmed partly from ``a substantial increase of incomes and continued acceleration of expansion in credit to the private sector.''
Central bank Governor Mugur Isarescu, who targets inflation of between 3 percent and 5 percent this year, has predicted year- end inflation of 5.9 percent. The central bank missed its 2007 inflation target of 4 percent, plus or minus one percentage point, as consumer prices surged an annual 6.6 percent.
Tuesday, April 22, 2008
IMF Calls For Interest Rate Hikes in Romania
Romania's central bank should raise interest rates further to curb inflation as the economy continues to ``boom'' this year, the International Monetary Fund has said.
``Inflation is now quite high,'' IMF country Mission Head Albert Jaeger said, speaking to reporters today in Bucharest. ``The booming economy is increasingly becoming a driver of inflation. More monetary policy tightening may be needed, principally in interest rates.''
Banca Nationala a Romaniei lifted its monetary policy rate half a percentage point to 9.5 percent last month as the inflation rate to an annual 8.6 percent. The bank, which makes its next interest rate decision on May 6, has raised the key rate at all four meetings since October, when it was 7 percent.
The bank missed its 2007 inflation target of 4 percent, plus or minus one percentage point, as consumer prices surged an annual 6.6 percent. The IMF said in a news release today that inflation will end this year at an annual 6 percent, above the central bank's target of between 3 percent and 5 percent.
Romanian inflation accelerated in March to the fastest pace in more than two years as a weaker leu boosted the cost of services and imports and rising wages and lending spurred consumption.
Romania must cut the inflation rate to 3 percent by the end of 2010 or risk missing its target of adopting the euro in 2014, central bank Governor Mugur Isarescu has said.
Jaeger predicted the economy will grow 6 percent this year, the same rate as last year. He said growth will probably slow to 4.7 percent in 2009 as richer countries import less and international investors grow wary of higher-risk investment.
``The slowdown in 2009 could be much sharper,'' Jaeger said. ``Global financial turmoil will spill over to Romania. External financing, which has been cheap in the past, will become more expensive.''
He also urged the government to refrain from increasing spending or lowering taxes in the near future, particularly in the lead-up to November 2009 parliamentary elections. The government targets a budget deficit this year of about 2.2 percent of gross domestic product although Jaeger said the government ``overestimates'' revenue for this year.
Jaeger said Romania's current-account deficit, which widened in the first two months of this year to 2.19 billion euros ($3.5 billion) from 2.08 billion euros a year earlier, is ``unsustainable.'' Fitch Ratings and Standard & Poor's have both lowered their outlooks on Romania's credit rating, citing the continuing current account shortfall as justification.
IMF Hard Landing Warning
The latest IMF Global Financial Stability report (published last week), warns thata number of Eastern European countires now face a continuing and growing risk of experiencing a "hard landing" as the global financial crisis continues to spread. The fund also drew attention to the possibility of serious of spillover problems arising for the Scandinavian, Italian and Austria banks that have lent heavily in the region, and this warning will not be taken lightly by these banks (whose benevolence and cooperation was, it will be remembered, thought to be the principal lifeline for the Romanian and Baltic economies in times of distress).
At the heart of the IMF's concerns are the large current account deficits being run in certain CEE countries, deficits which have now reached extreme levels in some cases, running to the tune of 22.9pc in Latvia, 21.4pc in Bulgaria, 16.5pc in Serbia, 16pc in Estonia, 14.5pc in Romania and 13.3pc in Lithuania.
"Eastern Europe has a cluster of countries with current account deficits financed by private debt or portfolio flows, where domestic credit has grown rapidly. A global slowdown, or a sharp drop in capital flows to emerging markets, could force a painful adjustment,"
The IMF said lenders in Eastern Europe had built up "large negative net foreign positions" during the boom, especially in the Baltic states. "Liquidity for these banks has all but dried up and [interest] spreads have widened 500 basis points."
Many of these countries concerned rely on credit from branches of West European and Nordic banks, but these foreign lenders are now themselves having difficulty raising money in the wholesale capital markets.
"A soft landing for the Baltics and south-eastern Europe could be jeopardised if external financing conditions force parent banks to contract credit to the region. Swedish banks, the main suppliers of external funding to the Baltics, could come under pressure,"
As the IMF note in their report, awareness of higher risks in the CEE countries has been rising in recent months, and this rising awareness has been been reflected in the performance of bank stocks exposed to the region, in Credit Default Swap spreads, and in the performance of the Romanian leu (see chart below) given that the leu is the only floating currency with a liquid forward market among the group of eastern European countries with large external imbalances. As we have seen it has depreciated substantially since July 2007, as investors have been expressing their negative views on the region as whole The stocks of Swedish banks exposed to the Baltics have underperformed other Nordic bank shares (and here) partly owing to significant short-selling and CDS spreads on sovereign debt have surged since August 2007, as investor demand for credit protection has pushed up prices. The interesting point to observe is how this is now all moving in tandem.
Monday, April 14, 2008
Romania Inflation March 2008
Romanian inflation accelerated in March to the fastest pace in more than two years as a weaker leu boosted the cost of services and imports and rising wages and lending spurred consumption. The annual inflation rate rose to 8.6 percent, the highest since January 2006, from 8 percent in February, according to data from the Bucharest-based National Statistics Institute this morning. Consumer prices rose 0.7 percent in the month, the same pace as in February.
Food prices, affected by a drought that destroyed one-third of Romania's crops last harvest, rose an annual 10.8 percent in March. Service costs, the most directly affected by a weaker local currency, increased 10.7 percent, the institute said. Prices of non-food goods rose an annual 5.9 percent.
The leu has fallen 15 percent against the euro since August which also puts some upward price pressure on imported products, although it does make Romanias exports cheaper, something which is badly needed given the ongoing trade and current account deficits.
These increases could well trigger well trigger yet another interest rate hike when the central bank next meets on May 6.
The central bank increased its Monetary Policy Rate half a percentage point to 9.5 percent last month, saying that inflation wouldn't likely slow until mid-year. The bank has now raised the key rate at its last four meetings (starting last October, when the rate was 7 percent). Romania's central bank has consistently highlighted wage growth as a main driver of inflation and the main threat to this year's inflation forecast. The difficulty is that further increasing the policy rate may simply drive more people to take out euro denominated loans at the cheaper interest rates which are associated with them.
The central bank missed its 2007 inflation target of 4 percent, plus or minus one percentage point, as consumer prices surged an annual 6.6 percent. The bank, which targets inflation of between 3 percent and 5 percent this year, has predicted year-end inflation of 5.9 percent.
Central bank Governor Mugur Isarescu also said last week that rising wages, which increased an annual 20.5 percent in February, risk sparking a ``second round'' of price increases in coming months. Household debt also rose an annual 66 percent in February amid a lending boom, giving citizens more disposable cash. 
