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Wednesday, March 26, 2008

Romanian Central Bank Raises Interest Rates Again

Romania's central bank raised its main interest rate, the highest in the European Union, by half a percentage point as inflation threatens to accelerate and the local currency weakens. The Banca Nationala a Romaniei increased its Monetary Policy Rate to 9.5 percent today. Policy makers also made clear that they are ready to raise rates further if they feel that this is necessary. The leu rose 0.1 percent to 3.7157 against the euro after the decision today, from 3.7179 late yesterday. In fact the leu had previously weakened 2.3 percent since February 4, when the central bank last raised its interest rate. The leu's drop makes items prices in euros more expensive. In Romania, rent, gasoline, phone bills and other goods and services are quoted in euros and paid in lei. The question we all need to ask ourselves here is whether the Romanian authorities are about to discover - in the context of interest rates and the need to defend the leu - that "what goes up, doesn't necessarily come down again".

The central bank will ``closely monitor developments in macroeconomic indicators and assess their outlook, standing ready to adjust instrument settings to counteract inflationary pressures,''

The bank has raised rates at every meeting since October to counter rising prices. Inflation in February was the fastest in two years as a drought boosted food prices and a weaker leu raised the cost of imports and services.The inflation rate rose to 8 percent in February, the highest since March of 2006, from 7.3 percent in January and 6.6 percent in December, the National Statistics Institute said on March 11.

The central bank also said inflation will likely remain above its targets ``in the following months'' because of higher food and fuel prices. It set its next rate decision for May 6.

One of the issues that all of this raises is the extent to which any local tightening policy can work at all whil private indebtedness - which grew an annual rate of 66.8% percent in January - continues to be fuelled by foreign exchange denominated (largely euro) cheaper interest loans, which grew at an astonishing and alarming 143.4% annual rate year on year in January. If you look at the chart below you will see that the level of leu denominated loans is virtually stationary, while the forex ones go through the roof. This situation reduces the central bank to the a role of a virtually impotent bystander.


Emil Perhinschi said...

"In Romania, rent, gasoline, phone bills and other goods and services are quoted in euros and paid in lei."

Rent is negociated in Euro, and most of the time is paid in Euro. Utilities or services except the mobile phone bills are never quoted in Euro, as for phone bills, Zapp (mobile phone company) quotes the prices in USD, while Orange and Vodafone in Euro.

No goods are quoted in Euro or USD, including gasoline, as far as I know.

The RON is pretty much the national currency.

Who is feeding you this information ??? Watch out, you might go the Marty way ... the "investigator" was so shamelessly and cruelly intoxicated that the local reaction to his reports was rolling on the floor laughing: for example, one of his informants for the first report told him that the US officials had half of the Tulcea county and half of Constanta county closed down as a security area for the Kogalniceanu airport ... and the guy forgot to verify and notice that in the area that was supposed to be "closed" were half the seaside resorts in Rumania, the highway and the railroad to the seaside, the Danube-Black Sea Chanel and a couple of large towns.

Edward Hugh said...

Hello again emil,

Nice to see you in again. I've hot a number of points I'd like to make, but first I'd like to refer to a recent JP Morgan report, and ask you if in your opinion it is completely false, and if it isn't, in what currencydo you think that the people who go shopping around between Romania, Ukraine, Bulgaria and Hungary actually pay in?

Romania - Gandul | Wednesday, February 13, 2008
Romanians go shopping abroad
Incomes in Romania are among the lowest in Europe, but price levels are similar to those in western Europe. The newspaper comments: "There is little money around, but a lot of speculators. A study conducted by J.P. Morgan Bank shows that prices in Romania are 59 percent of the EU average, but incomes only 37 percent, a discrepancy of 22 percent. In Bulgaria, which is supposed to be lagging behind Romania, the difference is only 8 percent. In the Czech Republic and Slovakia prices are lower than in Romania, but salaries are twice as high. ... Consumers respond to this by shopping elsewhere: people who live near Bucharest go to Bulgaria to buy cheap goods; people in Transylvania go to Hungary, and those in the north go to Ukraine."

Edward Hugh said...

"Who is feeding you this information ???"

The question isn't who, but rather what? The internet.

Basically surfing around it isn't difficult to find lots of prices quoted in euros. But look Emil, you are living in Romania, and if you tell me things aren't like this, then they aren't.

But c'mon, gasoline is never quoted in euros? Not even for tourists? And hire cars? and hotel rooms? And dentists? And electricitians without an invoice? And plummers - polish or otherwise - ditto. Are you seriously suggesting that people who work in the informal economy don't prefer to stash their money away in euros. Or dentists, or those infamous envelopes for doctors, in what currency do they prefer to get the envelope to give you the "adequate" treatment? C'mon.

And imported cars? Or flat screen TVs? I mean, if the loans are in euros, you surely aren't going to try and tell me that they kind lady or gentleman who sits the unsuspecting customer down in a nice soft chair and works out the repayment plan out spends half the morning working back and forth between lei and euros. The bank lends euros, and the importers who work with the banks are paid in euros (they aren't totally silly), and you the customer will be told "this is all so easy, you just need to pay 'x' lei every month for the rest of your life and this car will finally be yours (always assuming it doesn't get stolen first that is :) ).

And houses? Or land? According to Romania's construction entrepreneurs association President Laurentiu Plosceanu, quoted in Gandul, land prices are set to increase by 15-20% in the first quarter of this year "to reach 750-800 euro per square meter in Bucharest". Or cement which he says in Bucharest and the main cities has seen price boosts of 12% "to reach 85 euro per ton".

So I think that this is a bit extreme:

"No goods are quoted in Euro or USD, including gasoline, as far as I know."

I am not saying that Romania's economy is 100% euroised, or that the normal day to day currency for transactions is the euro, but simply that the effective virtual prices which mark the index around which lei prices move is the euro price (and especially in these days when the dollar is falling even faster than the lei, it's seems to me the company you quote that uses the dollar - Zapp - is effectively zapping itself).

The point really is that this underlying reality makes Romanian prices especially vulnerable to downward movements in the currency, and that Romania is now increasingly stuck in a high interest rate regime due to the need to protect the currency, and this is going to create an especially onerous situation, if we have enough time under the present state of things to get that far.

"The RON is pretty much the national currency."

You know, in today's world I really have no idea what this expression actually means, but I do note that you add the interesting qualifier "pretty much".

Emil Perhinschi said...

"Gandul" ... good choice ... a tabloid. Did you enjoy the article about how blood from the umbilical chord that was injected in the brain of elderly laboratory rats rejuvenated them ?

"people who live near Bucharest go to Bulgaria to buy cheap goods; people in Transylvania go to Hungary, and those in the north go to Ukraine."

So, this report claims that people in Rumania drive a hundred kilometers to get from Bucharest to Bulgaria to shop ? I still have to meet somebody who did go to Bulgaria to buy anything.

I know the people from Giurgiu or other cities or towns on the Danube cross to Bulgaria, but I guess it's because it's closer than Bucharest, and the Bulgarian cities on the Danube are bigger than their counterparts in Rumania and and probably better supplied. I have heard the prices there are smaller for certain luxury items, but not enough to warrant a long trip.

The same stands for Hungary: those that are closer to the border would probably find easier to go to Budapest than to Cluj or Bucharest to get to the well stocked shops.

As for Ukraine, the closest large city is at about 60KM from the border, and there is no Rumanian town larger than 10000 inhabitants within the range of 100 km by road from Chernowitz. Why would somebody shop in Ukraine when the transportation would cost them more than the difference in price ? This I can tell you exactly since my family lives within the sight of the border fence and of the custom house: not many cross the border to Ukraine to shop or to do anything because before Chernowitz there is not much to see but forests, small towns, and right across the fence one of the former suburbs of Siret, which last time I checked was on it's way to being abandoned (in favor of larger cities in Ukraine or Rumania) by it's inhabitants because of lack of any economic opportunity. It is true, in Siret, the town that's closes to the border, there are, in the flea market, some 10 to 20 Ukrainians selling contraband cigarettes, flathead screwdrivers and the such.

"A study conducted by J.P. Morgan Bank shows that prices in Romania are 59 percent of the EU average."

I don't know about that. Might be even true. Still, for electronics/IT, imported books, software, music CDs or movie DVDs the prices are higher in Rumania (sometimes way beyond 100%), and only during the last year began to get close to those further West. This might skew a bit the analysis, since it would allow the other prices to be a lot lower. Anyway, if I were to buy a professional video camera, I'd buy it in US, and it would come cheaper than buying it in Hungary even with transport and VAT.

"But c'mon, gasoline is never quoted in euros?"

What do you mean by quoted ? Like the price that's shown outside the gas station ? That is in lei, since Euro cannot be used legally for over-the-counter purchases yet. ... I'll check with the two gas stations on my way to work and come back to you tomorrow with details.

"And hire cars? and hotel rooms?"

Don't know about hire cars, but some hotels quote their prices both in lei and euro. I don't think it's legal to pay in euro, unless you do it with a credit card, in which case the bank will convert into leis ... at least that's what happens when I make purchases across the border: my bank takes my leis, does the exchange, takes it's cut and pays in the foreign currency in which the product is sold.

"And electricitians without an invoice?" etc.

Not really, since they will have to use an exchange office to get usable money, and lose some percentage on the transaction. In 1995 it might have happened, but that was 13 years ago ... now prices stay the same for more than a week, and sometimes for more than a year.

"And houses? Or land?"

Are we talking about commodities or about investment ? Investments are done in whatever makes sense. I collect books since I do not really trust Euro.

"Or flat screen TVs" - definitely sold in leis. Even if you take the loan in euro, you go to the exchange office, get leis and pay for the plasma (flat screen TVs are sooo 2002 ... nobody would take a loan for them). The loans you take in the shop are always quoted in leis.

"those infamous envelopes for doctors"

Not really infamous: they provide a service, you pay for it. The state just poaches 14% of my salary and those money do not get to the pockets of the said "infamous" doctors. That is quite well understood and accepted: most of the MDs have very small salaries, and if you care about your health, you will give that envelope, otherwise in a short time there will be not many alive and breathing doctors around. Yeah, I wish it was different, that my "medical insurance" would pay for my nose job, but it's not the doctor's fault.

"The point really is that this underlying reality makes Romanian prices especially vulnerable to downward movements in the currency ... "

The reality is that some goods are imported, and their over-the-counter price depends on the currency in the country they were bought from. Moreover, it makes sense to quote the price of cement in euro if you are selling or buying it by the ton, and even more so if you write about it in a tabloid: it takes less space in the newspapers to print "85 €" than to print "323.76 RON", and you can prove how knowledgeable you are in foreign matters. The bag of 20 kilos of cement for a home improving project is still sold in leis. Of course it's price will follow the exchange rate for euro, since the cement makers need to buy energy, which is made about 40% to 50% out of oil or gas, the price of which in Rumania is right now set by some Austrians, or by the Germans from which we buy Russian gas. Still, I paid for a haircut exactly the same amount as one year ago, and one bottle of local wine has almost the same price it had last year ... some brands are even cheaper now due to French dumping their liquors on us.

Of course the RON is vulnerable, but not necessarily because the Rumanian debt (both public or private), which I heard is amongst the lowest in Europe. I have the "CO2 emissions quota" higher on the list, since it was slashed, by the Great European Union politicos, by 20something percent from a level that was already way below the Kyoto obligations, and which will get a lot of the prices up and make the life a lot shittier than we would have made it ourselves. ... and that for no good reason, since if the NOAA charts are to be trusted, the global warming ceased some 8 to 10 years ago.

Emil Perhinschi said...

"in what currencydo you think that the people who go shopping around between Romania, Ukraine, Bulgaria and Hungary actually pay in?"

In HUF, in UAH, in BGL or even in RON. All those are respectable states that would never permit shop transactions to be done in other currency than that guaranteed by their governments. In the flea markets it might be different, though.

Edward Hugh said...

Hi again Emil,

Thanks for the input, I'm enjoying your perspective and your explanation.

"What do you mean by quoted ?"

Oh, I just mean a sign somewhere or other that says "super 1 euro a litre" or something, of course I agree that the cutomers pay in lei. But on the major thoroughfares and highways with international traffic?

Anyway, I agree I put the issue badly in the first place, and need to be more careful in my choice of words in future. Still, it has drawn out this rather interesting conversation.

Emil Perhinschi said...

'But on the major thoroughfares and highways with international traffic?'

Could have the prices both in Euro and in RON as a courtesy, though the guy responsible with deliveries here at the office says he did not see any gasoline prices quoted in euro.

For Rumanian press, I suggest you look at http://english.hotnews.ro/ , http://www.mediafax.ro/engleza.html?6966 or http://www.zf.ro/zf_english.html . Ever since most of the major newspapers were bought by Ringier or similar conglomerates, most of them have been turned into tabloids ... there was even a bit of scandal with journalists quitting en masse etc.