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Tuesday, August 12, 2008

Romania Inflation Accelerates Again in July

Romania's inflation rate rose to a three-year high in July as increases in government-administered prices added to pressure from a consumption boom which is being fuelled by soaring lending, rapidly rising wages and a strong stream of remittances from Romanians working in Spain and Italy. Inflation accelerated to an annual 9 percent in July from 8.6 percent in June, according to the latest data from the National Statistics Institute earlier this morning. On the month, prices rose 0.7 percent, following 0.3 percent rise in June.




The government increased natural gas prices by 12.5 percent and electricity prices by 5.3 percent effective July 1. It also raised taxes on tobacco to 50 euros ($75) per 1,000 cigarettes from 41.5 euros.


Romania's economic expansion, fuelled by consumer spending, cheap loans and surging wages, was seen by many as a benign process which were simply bring western European living standards to the EUs poorest member state. Now, inflation is soaring, property prices have started falling and the current-account deficit is widening steadily. Romania's increasingly looking like a copy-cat version of what has already taken place in the Baltic nations of Estonia and Latvia.


State-administered price increases added to pressure from rising international food and fuel costs to boost inflation from a 17-year low of 3.7 percent in March 2007. The increase have prompted the central bank to raise its key interest rate seven times since last October to the current level of 10.25%, which is the highest rate in the European Union.


A weaker leu, which has lost more than 11 percent of its value against the euro in the past year, has also pushed up consumer prices. Rising wages and a lending boom are the main drivers behind price increases in recent months. Net paychecks were up an annual 24.4 percent in June as private debt expanded 63.4 percent on year.

Central bank Governor Mugur Isarescu said on Aug. 4 inflation will start to slow this month as an expected bumper farm crop lowers food prices and the increase of state-administered prices slows. He added that the economy, which grew 8.2 percent in the first quarter, would expand as much as 9 percent this year.


Romanian annual wage growth, which prompted the central bank to raise the European Union's highest interest rates last week, accelerated to 24.4 percent in June as investment boosted demand for workers. Net monthly wages rose to 1,273 lei ($564) in June, the Bucharest-based National Statistics Institute said in an e-mail today. Growth accelerated from an annual 23.3 percent in May, while wages rose a monthly 2 percent.



Central bank Governor Mugur Isarescu said last week that wages are rising too fast, helping boost the inflation rate above 9.1 percent in July and outstripping productivity gains, while the economy is ``obviously overheating.''



Romania's entry to the EU last year set off labor migration to Italy, Spain and other bloc members, aggravating a labor shortage and further increasing wages. The remittances they send home on a monthly basis has also boosted demand for workers inside Romania.





Unemployment in June was 3.8 percent, the lowest rate in 16 years, the National Labor Agency said on July 10.




Higher paychecks are also helping spark a lending boom as Romanians exercise their increased borrowing power. At end-June 2008, total non-government credit was up year on year by 63.4 percent, or 50.5 percent in real terms, on the back of the 40.0 percent increase in RON-denominated loans (28.9 percent in real terms) and the 89.3 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 62.7 percent).



Romania's construction industry, including commercial and engineering works, expanded an annual 34 percent in May, the fastest pace in the EU, the institute said on July 4.



The Romanian Association of Construction Companies has said builders, who employ 300,000 workers in the nation of 22 million, need another 300,000 workers just to stay on scheduled with current projects.

Thursday, August 7, 2008

Romania Industrial Output and Retail Sales June 2008

Romania's industrial output increased year-on-year in June, according to the latest data from the National Institute of Statistics. However, on a monthly basis, output fell over May. Industrial output grew at a 4% year on year pace in June, helped by a 5.1% rise in production from the manufacturing sector. However, output of utilities fell 2.3%, and that of mining and quarrying declined by an annual 3.1%.



Month-on-month, industrial output fell 1.5% mainly because of a fall in production from the manufacturing and utilities sectors. However, output from mining increased. Most industries showed evidence of a decline in output. The steepest fall in output of 2.8% was for intermediate goods, followed by a 2.4% fall in the production of capital goods. Production of energy fell 0.7%, while consumer goods output fell 0.5%.



Meanwhile, in another report published this morning, the statistical agency said that the volume of retail sales excluding motor vehicles expanded 19.3% in June. This was helped by double digit growth from both the food and non-food sector. Retail sales of non-food items grew 27.1%, while that food, beverages and tobacco was up 10.9%.

Sales volume for the maintenance and repair of motor vehicles, motorcycles, which includes also retail sales volume of motor fuel, increased 23.5% in the month. The rise was mainly due to a 24.3% increase in the sale of motor fuels. Turnover in business services were up 7.3% in the month. Retail sales, excluding motor vehicle sale, increased 9.7%. Sales volume of motor vehicles and cycles, including repair and maintenance fell 13.7%. On the other hand, retail sales of services grew 23.6%.



Wednesday, August 6, 2008

Where Now for CEE and Baltic Currencies?

By Claus Vistesen: Copenhagen


Ever since the illusive credit turmoil began sentiment in the market place has been fickle and essentially, like the assets of which it consists, volatile. We started off with an adamant focus on downside risks to growth which then turned into a focus and fear of inflation. Now, as the cyclical data has turned for the worse in Europe and many places in Asia the focus seems to be reverting to growth. Now, I won't go into the whole decoupling v recoupling discussion at this point since I think that this dichotomy is a false one. It never was about de-coupling à la traditionelle but moreso about two interrelated points. The first would be the extent to which the world already has decoupled from the US in the sense that a key group of emerging economies are now set to ascend in economic prowess. The second would be the extent to which the de-coupling thesis always built on a fallacy. The main point would be that the main fault line of slowdown was observed across economies with external deficits; something which, I am sure most will agree, is sure to impact surplus economies too.

Now, that does not completely let the ECB off the hook since by maintaining a focus on inflation it also assumed the role, if only temporary, of the new anchor in a re-wamped version of Bretton Woods II as the Euro ascended to new highs. This bet on global re-balancing was always going to end in tears and in this light the Eurozone could not decouple from the US; that much, I think, is true.

The key issue here however, as I have argued time and time again is represented in two crucial interlocked questions which together form a key structural trend in the global economy. One is what happens when the surplus economies slow down and there is not sufficient demand to pull the economy back up? Demographics and a high median age are key variables to watch in this regard. The second question is the extent to which hitherto deficit nations can turn the boat around and increase savings (i.e. rely more on exports) and what it will mean for global capital flows when they begin this process?

In the context of the CEE economies the themes above are also present. In a recent note I detailed the change in sentiment from growth to inflation and what it might mean for Eastern Europe's economies and their respective currencies. The key situation as I sketched it was one of a dilemma.


On the one hand, the rampant inflation levels suggest that the exchange rate be loosened to allow appreciation and thus pour water on the roaring inflation bonfire. On the other hand however the Baltics, as well as many other CEE countries, are saddled with extensive external deficits financed by consumer and business credit denominated in Euros. It is not difficult to see that this represents a regular vice from which it will be very difficult to escape since as long as the peg remains deflation seems the only painful alternative as a mean of correcting.

(...)

Another point which is specifically tied to Eastern Europe is that if domestic nominal interest rate increase to keep up with inflation rates it will have a strong substitution effects towards Euro denominated loans. This can become a dangerous cocktail should the tide turn against the currencies.


Now that the focus seems to be changing back again it appears to be a good time to revisit the situation

Within this global nexus of what exactly to do with inflation relative to growth, many Eastern European economies has so far opted to go for inflation by raising interest rates. At an initial glance this seems quite reasonable and in many ways the CEE central banks merely latched on to market sentiment and expectations that many emerging economies would seek to use nominal appreciation as a tool to flush out inflation.

Consequently we have seen how both Ukraine and Hungary have chosen to loosen the peg to the Euro as well as other floating currencies in Eastern Europe have seen their yield advantage increase in an attempt to flush out inflation. This has not been without problems though or more specifically it is not clear that an appreciation of the currency is all for the good. Two points here would seem particularly important. One is the simple question of whether in fact an appreciation is deflationary in a world where capital flows, and in particular the hot kind, act strongly on yield. However, another point would be specifically tied to the situation in Eastern Europe. As such, nominal appreciation of the currency also increases the purchasing power which is not what many CEE economies need at the present time as they stand before the task of correcting a rather large external balance. Moreover, rising domestic interest rates will increase and exacerbate the credit channel by which loans denominated in Euros and Swiss francs become more attractive. I have shown this to be true, for example, in the context of Lithuania. The important thing to do note here would what would happen to the servicing of these liabilities should the domestic currencies depreciate.

What happens next then? Or more concretely, even though CEE currencies, in general, have enjoyed a rally on the back of market expectations of nominal appreciation fed by hawkish central banks what happens if and when central banks reverese course?

An initial warning shot across the bow was handed to us as the governor of the Czech central bank mused that he might lower rates come next meeting due to the strenght of the Koruna and the subsequent effect on exports. Also Poland recently opted to abandon the hawkish stance as rates were kept steady. In light of this event Macro Man managed, as ever, to hit the proverbial nail on the head.



There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way.


This is exactly the issue which now confronts many Eastern European economies. What to do as growth visibly tanks at one at the same time as inflation stays high. One thing here would be for the central banks to hold their raising cycle which in itself should ease the pace of appreciation but what if they need to lower rates.




Now the numbers above do not, in themselves tell anything remotely interesting. For one, the difference between the economies are quite big. For example the Czech Republic has been able to gain, with a comparatively low interest rate, currency appreciation which has actually helped the external balance in so far as it has made imports cheaper. Obviously, at this point the benign effect on the trade balance is just as much down to decreasing domestic demand as the value shield of a dear currency. On the other hand, if we consider especially Ukraine, Romania, and Hungary the price has been dearer and the subsequent effect on inflation less pronounced. One could always argue that the situation would have been much worse, but one thing is certain; the ensuing loss of competitiveness has not been compensated for with a decrease in inflation. And one has to wonder whether pushing nominal interest rates ever higher would be a sound solution.

The key here is that these high interest rates carry with them a high lock-in premium which makes it difficult to reduce them without causing substantial pain to the currency. Add to this that as long as interest rates stay in this territory the incentive to borrow in foreign currency remains very appealing. In fact, the incentive structure here is quite disruptive as many of these economies have higher rates on domestic currency deposits and lower rates on foreign credit. This incites consumers and companies to place their deposits in local currency while funding themselves in foreign currency. Finally, there is of course the more standard economics 1-0-1 point that whatever nominal rate is ascribed to a currency and an economy the latter needs to be able to provide the structural demand for which to satisfy the yield. Otherwise you just pour more gasoline on an already raging bonfire.

Obviously, as long as the local currency remains strong and on an upwards march or the trading band is kept in place the show goes on. But the longer this structure lingers the more difficult it will be to break free; and break free they must since I am quite sure that Eurozone membership is off, for the immediate future at least.

Another more hard hitting point would simply be that whatever growth momentum these economies had going into 2008 it is now steadily levelling off. Now, these economies need to rebalance their external accounts at the same time as they labour under the yoke of slowing growth, high interest rates which are difficult to reduce and/or a quasi fixed exchange rate to the Euro. Can you feel the chilling cold of deflation blowing across the Urals? I can.

Basically, the past years' rapid process of nominal convergence will now need to be kicked into reverse, since it is quite obvious that many CEE economies have been riding a blade too tough.

Be Careful Indeed

Last time I massaged this specific topic I summarised by ominously stating that the CEE economies and their central banks should be careful what they wished for in terms of using higher interest rates and subsequent nominal appreciation of their currencies to flush out inflation. The key point was that the effect would likely be limited and only further worsen the imbalances in the economies. And thus, here we are.

Another more subtle point in the context of market reactions would be the boomerang effect which comes from the currency appreciation as interest rates are increased (and the peg/band abandoned) to the subsequent plunge when the economic tide turns. In line with the change in global sentiment towards growth and deflation (see e.g. here) and the fact that other hitherto strong yielders (e.g. the Kiwi and Aussie) are beginning to falter we may be at an inflection point in the whole discourse of upwards movement in CEE currencies. Stephen Jen's recent tour of global FX markets is a fine addition to this argument.

As ever, this is obviously still a dilemma for most of these economies since inflation continues to rage ahead. In Romania for example the PPI rose at its highest pace since 2004. However, as long as the credit tap stays open and as long as the purchasing power is increasing so will the the demands for higher wages stay strong. This is particularly true in the context of the CEE economies as these are in possession of structurally broken population pyramids after two decades worth of lowest low fertility and, in the cast of the latter decade, net outward migration.

The main point I would like to emphasise here is that correction is coming and that it will only become harder the higher the currencies move upwards. In a more general light this correction will not be a small one and it most certainly will not be felt exclusively in Eastern Europe. Basically, the big hidden data point in all of this is the dependence of Germany on CEE imports. So far, this has moved along just nicely but Germany is in for a rude awakening once the link breaks ... and break, I am afraid, it will.

Tuesday, August 5, 2008

Romania Wages Accelerate To An Annual 24.4% In June

Romanian annual wage growth, which prompted the central bank to raise the European Union's highest interest rates last week, accelerated to 24.4 percent in June as investment boosted demand for workers. Net monthly wages rose to 1,273 lei ($564) in June, the Bucharest-based National Statistics Institute said in an e-mail today. Growth accelerated from an annual 23.3 percent in May, while wages rose a monthly 2 percent.



Central bank Governor Mugur Isarescu said yesterday that wages are rising too fast, helping boost the inflation rate above 9.1 percent in July and outstripping productivity gains, while the economy is ``obviously overheating.'' The central bank on July 31 raised its Monetary Policy Rate a seventh time to 10.25 percent.




Romania's entry to the EU last year set off labor migration to Italy, Spain and other bloc members, aggravating a labor shortage and further increasing wages. The remittances they send home on a monthly basis has also boosted demand for workers inside Romania.





Unemployment in June was 3.8 percent, the lowest rate in 16 years, the National Labor Agency said on July 10.




Higher paychecks are also helping spark a lending boom as Romanians exercise their increased borrowing power. At end-June 2008, total non-government credit was up year on year by 63.4 percent, or 50.5 percent in real terms, on the back of the 40.0 percent increase in RON-denominated loans (28.9 percent in real terms) and the 89.3 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 62.7 percent).



Romania's construction industry, including commercial and engineering works, expanded an annual 34 percent in May, the fastest pace in the EU, the institute said on July 4.



The Romanian Association of Construction Companies has said builders, who employ 300,000 workers in the nation of 22 million, need another 300,000 workers just to stay on scheduled with current projects.

Monday, August 4, 2008

Romanian Producer Prices Accelerate Again In June

Romanian producer prices rose at the fastest pace in over three years in June as energy prices increased and rising wages hit output costs. The cost of goods produced in factories and mines rose an annual 19.4 percent in June, compared with 16.8 percent in May, the fastest pace since October of 2004. Prices grew 2.1 percent on the month, after rising 1.7 percent in May.




Prices of manufactured goods rose an annual 22.1 percent in June, compared with 19.6 percent in May, while price growth in the mining and drilling industries quickened to 17.8 percent from 11 percent. The costs of electricity, natural gas and water rose an average of 0.1 percent, compared with 3 percent in May, the statistics institute said.

The Banca Nationala a Romaniei last week raised its main interest rate, the highest in the European Union, to 10.25 percent from 10 percent. Monetary policy makers have gradually raised the rate from 7 percent in September.