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BNR Report : Low discipline for payments, reduced level of financial brokerage and the demographic issue, vulnerabilities of the economy

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Low level of payment discipline in the economy, the reduced level of financial brokerage and the demographic issue are the main vulnerabilities at the address of financial stability in Romania, shows ‘ The report on financial stability’ published by the National Bank of Romania.

According to the central bank, the structural vulnerability which characterised the sector of non-financial companies in Romania over the last twenty years, with implications at the address of real economy and the financial system, aims at the important share of the non-financial companies with deficiencies regarding the level of capitalisation, together with low level of payment discipline in the economy.

‘Although at aggregate level this has improved, the dynamics in structure is heterogeneous and the risk of translating the challenges towards commercial partners, as well as to the banking sector is very high. The negative impact of the Covid-19 pandemics may be increased by this vulnerability’ the quoted document says.

At the end of 2019, the number of companies with values of the capitals under the regulated limit was 244,100, dropping by 5.9% as compared to the previous year, representing 35.4% of the total number of non-financial companies. Out of these, the majority (97%) had negative capitals (237,000).

Under these conditions, the authors of the Report show that, in order to get to the regulated level of own capital, the necessary of capitalisation for the companies in this category is significant. At the end of 2019, the value was 154.6 billion lei, dropping by 2.5% as compared to the previous year.

‘An important aspect which characterises the under-capitalised companies is the high level of persistence, namely the rate of keeping to this category. At the end of 2019, almost 30%of the companies had been in this situation for at least ten years, and 14.2% of these kept under-capitalised each year starting with 2008. The average duration for the companies to be under-capitalised is almost seven years. Analysing the evolution over the first six months of 2020, the necessary for capitalization had an improvement against June 2019, both for the companies in the private sector (-5 %) as well as for the state-run ones (-10%), shows the report on financial stability.

According to the quoted source, a direct consequence of the high number of under-capitalised companies is the lax discipline for payment in economy. The financing of the companies is made in an important measure through commercial loan (30% of their liabilities, in June 2020), and the rate of unpaid commercial debts, although dropping, keeps high (13% for all non-financial companies). In the previous crisis, the rate of unpaid commercial debts surpassed the level of 20%, the report says.

In the context, the BNR representatives recommend that governmental initiatives meant to help the flow of monetary circuits through the improvement  of the process of discounting commercial debts by calibrating them carefully, targeting the areas with perspective of sustainable development. Contrary, they draw attention that there is the risk that the support offered as state guarantees to increase the public debt without the beneficial effects.

As regards another vulnerability of the economy, namely the reduced level of financial brokerage, BNR shows that Romania has the lowest value of the indicator Europeanwise.

Thus, the non-governmental loan from the balance sheets of the banks represents 26.8% of GDP in December 2020, while in the countries in the region, such as Hungary (35%), Poland (48%), Bulgaria (52%) or the Czech Republic (54%) were placed at a higher level. The European average of the indicator was 92%.

‘This state is determined, on the one hand, by the issues of capitalisation of the companies, and, on the other hand, by their preference for using foreign financing, especially from the parent-company, in the case of companies with foreign direct investment (ISD). The supported growth of the debt of the resident companies from the non-resident group they belong to (four times in the interval December 2009 – December 2020) is an issue from the perspective of the risks for financial stability; thus, the companies with non-financial debts from the group are exposed to the shocks from the economies of the countries of origin of their parent-company and can contribute to their transmission at the level of the local economy’ the document shows.

 

The reduction of the gap between the rates of interests between the financing in foreign currency from the loan institutions in Romania and the loans offered by the non-resident financial institutions, namely financing type ISD, supported the resumption of the growing trend in the case of loans destined to the non-financial companies offered by the domestic banks, since the end of 2018. This significant reduction of the financing cost which a bank in Romania can offer by comparison to a non-resident loan creates new possibilities for a part of the financing of the companies coming from abroad to be offered domestically, with beneficial effects on the reduction of the foreign debt and the increase of domestic financial brokerage, says the National Bank of Romania.

Another vulnerability, the demographic issue, is manifested, due to the persistence of the negative birth rate and the phenomenon of migration over the last years.

According to BNR, the tensions on the work market are amplified by the ageing process of the population, correlated with the growth of the share of senior people dependent on the active population (17.3% of the population according to the residence on 1st January 2021 is represented by people aged over 65 up by 0.4 percentage points against the previous year) as well as the continuous trend of reduction of the resident population (-0.5% in 2021 vs.2020).

Moreover, the Covid-19 pandemics led to the increase of mortality (+14% in 2020 by comparison to 2019) and the diminution of the number of new born babies (-5% in 2020 against 2019), so that the negative birth rate worsened from a monthly average of 5.900 people in 2019 to 9.880 people in 2020.

‘In this context, to reduce the pressure on the active population and support the balance on the work market, it is essential to improve the availability of the qualified personnel, corroborated with the efficiency of the education system, focusing on the adequate training of the workforce. The improvement of the digital abilities in the domain of new technologies may strengthen the capacity of the workforce to adapt to the structural changes generated by a growing level of activities automation’ the Report published by the central bank shows.

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