Slide 1Monetary Policy and Policy Mix …………………........……...22
Real Sector Developments …………………….………….......28
*
Average annual rate:
4.84% in 2007
GDP growth:
2006: 7.9% based on increases in final consumption by 9.3% (private consumption grew 11.4%) and in investment by 19.3%
Jan.-Sep. 2007: 5.8% based on increases in final consumption by 9.7% (private consumption grew 9.9%) and in investment by 25.3%
Current account deficit:
2006: EUR 10.2 bn., up 47.4% yoy; (10.4% of GDP); 86% covered by FDI
2007: EUR 16.9 bn., up 66.1% yoy; (14.4% of GDP); 42% covered by FDI
Foreign Direct Investment:
Recent Macroeconomic Developments (1)
International reserves (foreign currency including gold):
2007: EUR 27.2 bn.; forex reserves EUR 25.3 bn.
January 31, 2008: EUR 27.6 bn.;
forex reserves EUR 25.6 bn. (covering about 4.8 months of prospective goods-and-services imports)
Financial intermediation
Real growth of loans to the private sector
2007: 50.5% (RON: 30.6% foreign currency: 72.6%)
Recent Macroeconomic Developments (2)
Wage increases overtaking productivity gains
Protraction or even worsening of the wage-productivity mismatch might lead to a dangerous wage-inflation spiral
Implementing a looser budget policy, specific to an election year
Failure to achieve the planned dynamics of budget revenues and making unforeseen public expenditures
Financing current expenditures to the detriment of capital expenditures
Faster deterioration of inflation expectations
Higher oil prices
Further increase in the oil price is a plausible scenario on international markets
Good agricultural year
Boosted by a favourable base effect, the larger-than-expected increase in agricultural output (the projection assumes an average agricultural year for 2008) would have a sizable impact on food prices
The Government’s commitment on:
Wage increases in line with productivity gains
Narrowing of the budget deficit
Improvement of public spending structure
Potential Causes for Deviation of Inflation Rate
from the Projected Path
Nature of risks and uncertainties associated with the current medium-term projection is generally similar to the previous one (November 2007)
HOWEVER
In the event of upside risks to inflation materialising – especially if occurring simultaneously, this could have more severe consequences given the tensions in the international and domestic environments
The effects of the fiscal easing which in the previous years had allowed companies to absorb cost-related shocks without their having a major impact on inflation have faded
External financing will be available at higher costs, at least
for a period of time
Consequences of Risks
*
*
Even though annual inflation rate is projected to exceed the upper limit of the annual variation band until 2009 Q1, the NBR has chosen to tighten its monetary policy stance instead of revising inflation targets
Over a period marred by numerous uncertainties and exogenous shocks, it is of the essence to:
Bring inflation as fast as possible back to the announced medium-term disinflation trajectory
Ensure the sustainability of disinflation by avoiding a wider current account deficit
Maintenance of Inflation Targets
for 2008 and 2009
*
Decisions of the NBR Board
To raise the monetary policy rate three times in the last 4 months (by 0.5 pp in November 2007, by 0.5 pp in January 2008, and by 1 pp in February 2008) to 9.0 percent p.a., from 7.0 percent
Proactive measures substantiated by:
need for efficient anchoring of inflation expectations
boost in saving by ensuring a real positive interest rate, considering the need to reduce the savings/investment imbalance, aimed at correcting the external deficit
To continue to pursue a firm management of money market liquidity via open-market operations
Ensure efficient transmission of the monetary policy signal
Contain the volatility of short-term money market rates
To adopt additional prudential measures, including higher provisioning for foreign exchange-denominated loans to unhedged borrowers
*
*
Separate recognition of the currency risk effects assumed by borrowers, natural entities, through additional provisioning of foreign currency-denominated loans to unhedged borrowers (individuals who do not earn incomes in the loan denomination currency)
Lenders must submit to the NBR their amended internal lending norms, within 30 days from publication of the new provisions in the Official Gazette, so that they comply with the recently adopted requirements
Prudential Measures Adopted
*

A restrictive monetary policy can offset only partly the lack of support from budget and fiscal policies and income policy in attaining the price stability objective:
Usually, over the short term

The outcome is suboptimal in terms of real convergence in the medium and long term
Economic Policy Mix and Macro-stability (1)
*
*
Economic Policy Mix and Macro-stability (2)
The economic policy mix needs to be reconsidered all the more so as:
Turbulence on world markets is persistent
The increasing international prices of agri-food items, energy and gold fuelled inflation
Romania’s external deficit has widened to unsustainable levels need for gradual correction (to avoid disorderly correction)
*
Optimal Economic Policy Mix
Continuation of structural reforms so as to boost the growth of productivity and external competitiveness of Romanian products
High monetary policy restrictiveness
Tighter-than-expected fiscal policy, likely to help narrowing macroeconomic imbalances
Containment of public spending growth and its channelling mainly towards public investment meant to foster the production potential of the economy
Improved budget planning by approving multiannual budgets and ensuring a uniform and predictable budget execution
An income policy matching productivity gains
*
*
Liberalization of International Flows
1998: Current account operations (Art. VIII of IMF Articles of Agreement)
1999: Medium- and long-term capital inflows
2001-2002: Capital flows with low impact on the balance of payments
2003-2004: Capital flows with significant impact on the real sector
2005-2006: Capital flows with significant impact on the balance of payments
September 2006: Full convertibility of the national currency
*
Full convertibility of the RON renders monetary policy conduct difficult
Massive inflows of speculative capital put downward pressure on the exchange rate of the RON
Support disinflation in the short term
BUT
great likelihood of a reversal in speculative flows
keener interest in forex borrowings increase in external indebtedness of domestic companies, particularly in the short term currency risk overexposure
Foster excess demand
Exchange Rate – Recent Developments and Outlook
The nominal appreciation trend manifest over the past three years came to a halt
The RON exchange rate reverted to a trajectory compatible with macroeconomic fundamentals, following the overappreciation at mid-2007
The correction was faster and larger due to the increased risk aversion of investors, caused by the US sub-prime mortgage crisis
In spite of the unfavourable short-term impact on inflation, exchange rate flexibility is an advantage, as it:
Allows the avoidance of excessive accumulation of macroeconomic imbalances which may generate crises
Operates as a self-correcting mechanism of current imbalances, alleviating the impact of external shocks
*
*
*
*
*
*
*
Daily Nominal Exchange Rates
Total assets
Non-govt. credit
87.3
88.2
83.3
7.8
8.2
10.6
4.9
3.6
6.2
Pressures exerted by movements in relative prices
Further adjustments of administered prices (especially energy price)
Still strong domestic demand
*
Establishment of domestic market for long-term capital and interest rate convergence
Relative stability of the RON exchange rate (amid full convertibility) around the long-term equilibrium level (sustainable exchange rate)
Fostering of structural reforms
2. Timing of ERM II entry is set for 2012:
In order to ensure a period needed to:
fulfill nominal convergence criteria
3. Euro zone entry expected for 2014
Euro Adoption (2)
*
Inflation targeting strategy will be kept in place until ERM II entry at least
Cohabitation between inflation targeting and an explicit exchange rate target is challenging
Inflation targeting ensures gradual achievement of the Maastricht criteria and is supportive of real convergence
ERM II Entry and Inflation Targeting
*
*
*
*
*
*
livestock, animal and
vegetal products, food,
beverages and tobacco
at end-November 2007
2004200520062007f20042005200620072004200520062007f
Bulgaria
6.66.26.16.36.157.38.4-6.6-12.0-15.7-21.5
Source: websites of central banks, National Institute of Statistics (for Romania), European Commission
Macroeconomic Developments
Real GDP change
Inflation Rate
Inflation Developments
Target 2006
Target 2005
Source: National Institute of Statistics, National Bank of Romania calculations
percent
Source: National Institute of Statistics, National Bank of Romania calculations
*) products with volatile prices: vegetables, fruit, eggs, fuels
Inflation Rate and Changes in Administered and Volatile Prices
Headline Inflation and CORE Inflation
2
3
4
5
6
7
8
9
10
11
Dec.04
Mar.05
Jun.05
Sep.05
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07
Source: National Institute of Statistics, National Bank of Romania calculations
*) products with volatile prices: vegetables, fruit, eggs, fuels
**) the influence of excise duties and vice tax is removed
Sources of Inflationary Pressures
fuels
food
Source: National Institute of Statistics, National Bank of Romania
annual percentage change
Food Price Inflation – Major Causefor Overshooting Inflation Targets Worldwide
1) November 2007
Romania
(Dec./Dec.)
0
2
4
6
8
10
12
14
16
Poland
2005
2007
percent
1
2
3
4
5
6
7
8
9
10
1
2
3
4
5
6
7
8
9
10
3.0
3.3
3.5
3.8
4.6
5.0
10.0
10.2
12.6
18.4
Netherlands
Austria
Germany
France
Cyprus
Italy
USA
Source: Trade Register
Tradables and Non-tradables* Prices
tradables (goods)
*) based on COICOP
- Bank Survey Conducted by the NBR -
0
1
2
3
4
5
6
Sep.06
Nov.06
Jan.07
Mar.07
May.07
Jul.07
Sep.07
Nov.07
Jan.08
percent
0
1
2
3
4
5
6
Source: survey conducted by the NBR
Inflation Forecast
Source: National Institute of Statistics, National Bank of Romania calculations
annual inflation rate*
*) projection based on consumer basket composition for 2007
Note: according to the February 2008 Inflation Report
2.1
5.7
5.1
5.2
8.5
4.2
7.9
6.1
20002001200220032004200520062007*
annual percentage change
(GDP component)
gross fixed capital formation
actual household final consumption
Source: National Institute of Statistics, National Bank of Romania calculations
industry
agriculture
Source: National Institute of Statistics, National Bank of Romania calculations
change in stocks
Industrial Output
forecast
Trade Balance
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
EUR million
(monthly data)
EUR million
In 2007, yoy growth of exports and imports was 13.7% and 24.9% respectively.
Current Account Deficit Financing via FDI
-10.2
capital transfers
EUR billion
Current account financing via FDI (including capital transfers) amounted to 46.4% in 2007 vs 85.6% in 2006.
In 2007, net FDI decreased by 19% yoy.
Gross International Reserves
banks' foreign exchange
Source: National Bank of Romania, Ministry of Economy and Finance
official foreign exchange reserves - months of goods-and-services imports
official reserves - months of goods-and-services imports
public and publicly guaranteed debt - months of goods-and-services exports
months
*) 31 Jan.
Note: For 2008, calculations based on prospective imports of goods and services
Source: National Bank of Romania, Ministry of Economy and Finance
MLT External Debt
RON/EUR
Real Exchange Rate of the RON against the EUR
70
80
90
100
110
120
130
140
150
160
170
Jan.01
May.01
Sep.01
Jan.02
May.02
Sep.02
Jan.03
May.03
Sep.03
Jan.04
May.04
Sep.04
Jan.05
May.05
Sep.05
Jan.06
May.06
Sep.06
Jan.07
May.07
Sep.07
Jan.08
based on ULC in industry
Appreciation (+)/Depreciation (–)
Source: National Bank of Romania calculations, National Institute of Statistics, International Financial Statistics
100
110
120
130
140
150
160
170
180
2001200220032004200520062007
Source: National Institute of Statistics, National Bank of Romania calculations
labour productivity
2000=100
100
105
110
115
120
2001200220032004200520062007
previous year =100
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.0
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
5.0
Jan.00
Jul.00
Jan.01
Jul.01
Jan.02
Jul.02
Jan.03
Jul.03
Jan.04
Jul.04
Jan.05
Jul.05
Jan.06
Jul.06
Jan.07
Jul.07
Jan.08
PLN/EUR
230
240
250
260
270
280
290
Jan.00
Jul.00
Jan.01
Jul.01
Jan.02
Jul.02
Jan.03
Jul.03
Jan.04
Jul.04
Jan.05
Jul.05
Jan.06
Jul.06
Jan.07
Jul.07
Jan.08
HUF/EUR
3.0
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.0
4.1
4.2
Jan.03
May.03
Sep.03
Jan.04
May.04
Sep.04
Jan.05
May.05
Sep.05
Jan.06
May.06
Sep.06
Jan.07
May.07
Sep.07
Jan.08
May.08
Sep.08
Jan.09
May.09
Sep.09
Jan.10
May.10
Sep.10
Jan.11
RON/EUR
depreciation 17.5%
(fixed-base indices)
25
26
27
28
29
Jul.07
Aug.07
Sep.07
Oct.07
Nov.07
Dec.07
Jan.08
of Selected Central and East European Countries
90
100
110
120
130
140
150
160
170
180
190
2000200120022003200420052006200720002001200220032004200520062007200020012002200320042005200620072000200120022003200420052006200720032004200520062007
Source: Eurostat, National Institute of Statistics, National Bank of Romania
index, 2000=100
Czech Rep.HungaryPolandSlovakiaRomania**
* based on average annual nominal exchange rate and consumer price index; ** 2003=100
2007
-8
-4
0
4
8
12
16
20
Pentagon of Key Factors Impacting the Exchange Rate
Comparisons between Romania, Czech Republic, Poland, Hungary
-4.4
-3.5
-2.0
-1.5
-1.5
-1.4
-1.9
-2.9
20002001200220032004200520062007*
Source: Ministry of Economy and Finance, National Institute of Statistics, European Commission
General Government Deficit /GDP
2007 (preliminary data): -2.4% (IMF Methodology)
Public Debt
20.9
21.8
20.2
14.1
3.8
4.2
4.8
4.7
11.9
9.3
12.5
17.2
3.1
3.3
4.3
24.7
26.0
25.0
21.5
15.8
12.4
18.8
0
5
10
15
20
25
30
20002001200220032004200520062007*
Source: Ministry of Economy and Finance, National Bank of Romania, National Institute of Statistics
0
5
10
15
20
25
30
NBR Sterilization Volume and the Balance
of the State Treasury Account
0
5
10
15
20
25
30
35
Jan.05
Mar.05
May.05
Jul.05
Sep.05
Nov.05
Jan.06
Mar.06
May.06
Jul.06
Sep.06
Nov.06
Jan.07
Mar.07
May.07
Jul.07
Sep.07
Nov.07
Jan.08
0
5
10
15
20
25
30
35
average interest rate on sterilization operations of NBR (right-hand scale)
balance of the state Treasury account
Source: National Bank of Romania
percent per annum
-4
-2
0
2
4
6
8
10
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07
percent
real policy rate (%p.a.)
NBR policy rate (% p.a.)
inflation rate (percentage change against the same period of previous year)
Source: National Bank of Romania, National Institute of Statistics
Inflation Rate and Interest Rates
0
4
8
12
16
20
24
28
32
Jan.04
Jul.04
Jan.05
Jul.05
Jan.06
Jul.06
Jan.07
Jul.07
Jan.08
percent
the same year-earlier period)
sterilization operations (% p.a.)
the same year-earlier period)
financial corporations and households (% p.a.)
average interest rate on RON-denominated time deposits
from non-financial corporations and households (% p.a.)
NBR policy rate: 9% starting with February 4, 2008
Interest Rates in the Banking System
0
5
10
15
20
25
30
35
Jan.04
Apr.04
Jul.04
Oct.04
Jan.05
Apr.05
Jul.05
Oct.05
Jan.06
Apr.06
Jul.06
Oct.06
Jan.07
Apr.07
Jul.07
Oct.07
Jan.08
0
5
10
15
20
25
30
35
new RON-denominated loans to non-financial corporations and households
NBR interest rate on flow of sterilization operations (deposit taking, CDs)
NBR policy rate
percent per annum
EUR million
Imports cif
percent
loans to households
foreign currency-denominated loans
forecast
0
10
20
30
40
50
60
70
80
90
100
Dec.91Dec.98Dec.00Dec.02Dec.03Dec.05Dec.06Dec.07
non-government credit
total assets
Banking Indicators
percent
banks/ total assets
attracted and borrowed sources
2.02.11.41.5
2.92.6
31.2
253.6
3.3
2.7
2.0
12.7
18.1
21.120.621.2
25.0
28.2
10.3
17.9
23.8
14.0
10.2
12.7
15.6
15.6
-15.3
1.0
12.5
21.8
18.3
10.3
10.4
-20
-15
-10
-5
0
5
10
15
20
25
30
35
Dec.98Dec.99Dec.00Dec.01Dec.02Dec.03Dec.04Dec.05Dec.06
Sep.07
Dec.07
-200
-150
-100
-50
0
50
100
150
200
250
300
350
*) Reference level according to ECB's Convergence Report, May 2007.
***) 2007 forecast; according to ESA95 methodology
Source: ECB, Eurostat, National Institute of Statistics, National Bank of Romania, European Commission
**) The period 2006-2007 was considered, as the fulfilment of this criterion is assessed depending upon exchange rate
stability over the past 2 years.
11.9
performing Member States
performing Member States
4.286.74
30.266.146.8
2.9
6.42.7
-30
-20
-10
0
10
20
30
2000-20012001-20022002-20032003-20042004-20052005-20062006-2007
±15%
percent
2000200320062007p2000200320062007p
EU-15
23,10024,80027,80029,10021,90023,50026,30027,600
Bulgaria
1,7002,3003,3003,8005,3006,7008,6009,500
Source: Eurostat, National Institute of Statistics, National Bank of Romania
EURPPS*
Source: National Bank of Romania, National Institute of Statistics
0
20
40
60
80
100
120
Dec.05
Feb.06
Apr.06
Jun.06
Aug.06
Oct.06
Dec.06
Feb.07
Apr.07
Jun.07
Aug.07
Oct.07
Dec.07
National Institute of Statistics
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07
(in real terms)
National Institute of Statistics
0
10
20
30
40
50
60
70
80
90
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07
Loans to the Private Sector
Source: National Bank of Romania,
National Institute of Statistics
0
10
20
30
40
50
60
70
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07
Source: National Bank of Romania, National Institute of Statistics
(in real terms)
0
10
20
30
40
50
60
70
80
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07
(in real terms)
0
10
20
30
40
50
60
70
80
Jan.07
Feb.07
Mar.07
Apr.07
May.07
Jun.07
Jul.07
Aug.07
Sep.07
Oct.07
Nov.07
Dec.07
Jan.08
(in real terms)
0
10
20
30
40
50
60
70
80
90
Dec.05
Mar.06
Jun.06
Sep.06
Dec.06
Mar.07
Jun.07
Sep.07
Dec.07