IMF to Romania: Banking assets quality will deteriorate

Sharp economic downturn calls for a recalibration of policies

Romania’s economic activity has deteriorated sharply since the approval of the stand-by arrangement in May, said John Lipsky (photo) first deputy managing director of IMF. He stressed that the deeper than expected economic downturn called for a recalibration of policies so as to strike an appropriate balance between the short-term response and to the crisis and the medium-term policy objectives.

“The revised program focuses on measures that would secure permanent reductions in current spending, while preserving capital and social safety net spending. However, the reductions contemplated will require additional reforms to strengthen controls over areas that pose the largest fiscal risk—including expenditure commitments, pension reform, contingent liabilities, and public entities outside the central government—are crucial”, said John Lipsky.

Initially IMF had estimated a 4.1% decline of GDP in 2009. In August, IMF representatives have revised forecasts upward, to 8% to 8.5% of GDP this year saying Romania has slid into a severe recession.

The projection of a sharper economic contraction has led to a modification of budget gap target to 7.3% from 4.6% of GDP for end-2009.

First deputy managing director added “improved stability in financial markets and declining inflation may provide some room for further easing, but a cautious approach is warranted given the still high inflation rates and remaining vulnerabilities to external pressures”.

Inflation targeting regime and flexible exchange rate policy have helped cushion the impact of the crisis while providing an appropriate anchor for monetary policy.

However, Lipsky warned that “financial policies should remain appropriate to tackle the challenges posed by the crisis, and continued vigilance will be needed to respond to any signs of stress in the banking system, particularly the deterioration in asset quality to be expected as a result of the continued weak economy”.

Loans 90 days or more past due increased share in total banking system lending to 1.03% in June this year, versus 0.3% a year earlier, according to the monthly bulletin published by the National Bank of Romania.

Loan arrears expected to increase further

Romanian economists say IMF assessment was adequate, not too strict but not too tolerant, and the following reviews will be similar. Moreover, economists say Romanian banking system is solid, but don’t omit the fact that delinquencies among borrowers is expected to increase further.

“NPL ratio is expected climb, but I think Romanian banking system is well positioned so as to cushion even more severe financial shocks”, Ionut Dumitru (photo), senior economist of Raiffeisen Bank Romania told Wall-Street.

IMF officials have monitored the local banking system and called for Romanian banks to be subject to stress tests based on different scenarios to identify banks’ vulnerabilities and review their capital adequacy ratios.

The National Bank of Romania will conduct a new round of stress tests in fall for the local banks.

“In fall, the situation of bad debtors will get worse, the number of bankruptcies will increase, and many distressed companies have banking loans to repay”, Laurian Lungu, managing partner of Macroanalitica told Wall-Street.

However, the future reviews conducted by IMF depend largely upon how Romanian authorities will put in place wage and pension reforms until the presidential elections.

The Government committed to pass the single wage grid law in the public sector by the end of October and admitted over the normative act under which the public sector payroll would be reduced from current 9% of GDP to 7% of GDP until 2015.

Next tranche likely to be disbursed on Christmas

The second SDR 1.718 bln or €1.85bln will be disbursed within 48 hours since the approval by the IMF board.

The total disbursements under the two-year program of €12.348 bln stand at SDR 6.088 billion (about €6.570 bln).

This year, IMF officials will make another review of the local banking system due in the last months of the year, after which the institution might approve and disburse the SDR 1.409bln tranche.