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Central bank governor warns on severe systemic risk for Romania's economy
The National Bank of Romania (BNR) has added proposed retroactive legislation and the looming Brexit to its list of challenges to Romania's economy, BNR Governor Mugur Isarescu announced on Thursday, on the presentation of the latest risk report of the central bank."The present report maintains the six risks identified in the previous report, to which it adds two new ones: a severe systemic risk — a legislative risk, and a high systemic risk resulting from the possible exit of the United Kingdom from the European Union," the governor stated.
The severe systemic risk in the April report is a premiere for Romania. "Over the past six months, legislative initiatives were identified, aiming at regulating the financial and banking sector, by a retroactive intervention in contracts agreed by customers and banks," Isarescu explained. He was especially referring to a bill on voluntary foreclosure, which would allow debtors to settle loans by giving in payment their mortgaged real estate.
Reforms and their benefits are not irreversible, Isarescu warned; according to him, external risks add to the threats to the country's financial stability. "Today we're talking on an international level about the interests decreasing below zero, about a secular stagnation — topics that were unimaginable 50 years ago. In such an external environment, we should be careful about what remains — and the market economy fundamentals must stay — and what changes, we should be careful not to create additional internal vulnerabilities on top of these great external changes," he said.
He called for a consolidation of fiscal policies and for avoiding a procyclical behaviour of the mix of policies, to make the economic growth sustainable and durable, as unsustainable growth "would turn against the very economic growth, as corrections become inevitable."
In his turn, deputy BNR governor Liviu Voinea declared, while presenting the Report on financial stability, that Romania has a solid macroeconomic situation but risks on financial stability have grown, both in number and intensity in the last 6 months, and some of them have already been present.
“Financial stability has been robust, but risks have grown, both in number and intensity. Since October last to the present two new systemic risks have appeared. A domestic one of highest intensity - the uncertain and unpredictable legislative frame in the financial banking field and a foregin one of high intensity - the risk on Great Britain’s possibly leaving EU,” Voinea explained.
According to him, the systemic domestic risk does not refer just to the law on debt discharge, but also to the series of legislative initiatives which intend to intervene retroactively in credit contracts, affecting the stability and predictability of the legislative frame with impact on financial stability.
Moreover, two the risks from the previous report are now materializing.
“The first one has in view the return to pro-cyclic fiscal policies at domestic level, partially materialised by the adoption of 2016 budget, returning to the talk about reversing fiscal consolidation with implications on the sustainability of budget deficit next year,” Voinea considers.
According to him, in 2010-2015, Romania underwent a difficult process of fiscal consolidation, while many governments with different measures went to the same direction of reducing deficits year by year.
“The target of middle term budget deficit was reached in advance - structural deficit of 1%. In 2016, the budget deficit in cash terms doubles. In ESA terms, the EU engagement accounting trebles. These are the data,” the BNR deputy governor pointed out.
He reminded the fact that he had warned ever since the October 2015 report that “if we have a 3% of GDP deficit on middle term, which means more than three years, public debt will exceed the alert threshold and at that moment the recession risk exceeds 50%. For 2017, in the absence of fiscal-budget measures, budget deficit will be 3.8% and even 4%, Voinea added.
Another risk which has already manifested refers to the divergence of monetary policies of the main central banks, considering that the Federal Reserve has released the interest rate increase cycle. In that context, Voinea said that the high uncertainty at foreign level should not be aggravated by domestic vulnerability.
“We have a dropping systemic risk, the one associated to foreign exchange credits,”the BNR official added.
At the same time, Voinea mentioned a series of positive aspects included in the report: the fact that BNR fully returned the loan received from IMF in 2009, that the banking sector continued to be consolidated while the contagion risk dropped, the stock of credits in lei became a majority while the people’s access to credits for the purchase of houses improved, but risks to go down because of the recent legislative initiatives. Payment discipline also improved but remains an important vulnerability for companies.