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Romanian Central Bank Household Lending Rules Could Slow Dn Econ Growth In 2009 – BCR

Romania could see a slowdown in economic growth starting 2009, especially in construction and services, as an effect of the central bank's regulations limiting household lending risk, Romania's largest lender Banca Comerciala Romana, or BCR, said in a report.

Analysts added a positive effect of the central bank's rules would be a narrowing of the country's trade deficit on the segment of fast moving consumer goods.

"If the central bank's decision overlaps the already existing positive trend, we expect a lowering in Romania's external vulnerability, which is the main reason for concern among ratings agencies and international analysts. What remains to be seen is whether measures will have a bigger effect on consumer lending, which has boosted household consumption over the past quarters, or whether it will have a bigger impact on mortgage lending," the report noted.

The central bank's new lending rules, adopted in August, will have a major impact on foreign currency lending in terms of debt ceilings, which are to be calculated factoring in the highest possible interests and fees and the worst-case scenario for currency exchange rates.Under the new household lending rules, commercial lenders will calculate debt ceilings taking into account incomes higher by no more than 20% than the applicant stated with fiscal authorities in the previous year.

"The new rules might have a bigger impact on retail lending than the central bank's successive monetary policy rate increases," the report noted.

Analysts expect a more prominent slowdown in retail lending compared to previous years and consider credit growth would have slowed down even without the central bank's measure, due to the base effect.

"Under a more pessimistic scenario, these measures could lead to a more abrupt slowdown in economic growth, while a more neutral scenario indicates a moderate slowdown," BCR analysts said in the report.

The central bank's lending risk measures and this year's economic growth could prompt BCR analysts to revise down forecasts for 2009 economic growth from their current estimate of 6%. BCR analysts see a gross domestic product growth of 8.3% this year, on a positive third quarter economic growth outlook driven by good farming output.

In the fourth quarter of the year, services and constructions may be affected by the central bank's restrictive monetary policy and ongoing turmoil on international financial markets, analysts said.BCR analysts said Romania's annual inflation will lower considerably in August, and an optimistic scenario even sees deflation.

"Lowering international oil prices, a rich domestic supply of food products, the monthly appreciation of the Romanian leu will have a positive influence on inflation. September might also bring a considerable reduction in inflation," the report noted.Analysts see inflation at 6.2% this year and 4.5% in 2009.

BCR Report :Average exchange rate of the euro - 3.55 lei in 2009 The average exchange rate of the euro will be 3.55 lei in 2009, on a slight decrease against the average estimated for 2008, of 3.6 lei, according to the Macroeconomic Synthesis conducted by the BCR Research.The euro stood at 3.33 lei in 2007.According to the spring forecast of the National Prognosis Comission (CNP), the average leu/euro exchange rate for 2008 stood at 3.55 lei/euro. For 2009, the CNP estimates that the euro will reach 3.45 lei.

BCR: Economic growth possibly at plus 8 pct in 2008, but down 2 pct in 2009 Romania's economic growth might top 8 pct in 2008 but will lose two percentage points in 2009, getting down to some six pct, reveals a Synthesis of Macroeconomy worked out by BCR Research.

The latest developments in agriculture reveal that Romania is further dependent on weather conditions, which escape its control power. Even if the 9.3 pct economic growth registered in Q2 carries macroeconomic risks, a mere shrinking of the value to six pct unaccompanied by a structure shift from consumption towards a net positive export is not enough to diminish the risk of economy overheating.

Following the same thread, it results that the monetary policy is less efficient in the longer term and Romania needs major investments in the processing industry and agriculture in order to rise aggregate supply and improve the structure of economic growth.The 9.2 pct economic growth in Q2 exceeded by far analysts' expectations which stood around 7.8 pct and the estimations of BCR, which were more optimistic than the market average. Under such circumstances, chances for the all-year GDP growth to exceed eight pct are increasingly higher. Outlooks for Q3 are very good, mainly due to the results in agriculture (the wheat crop increased by some 150 pct from 2007 and the gross value added in agriculture might rise by a quarter in Q3.)According to BCR analysts, some risks are still looming over the last quarter of the year, mainly as far as services and constructions are concerned, possibly affected by the central bank's restrictive monetary policy and the turmoil on international markets. Industrial production might further perform below expectations as the basic positive effect of the commissioning of a new nuclear reactor in 2007 is progressively fading.

BCR: Foreign direct investments expect to attain bln. 7.8 euros in 2008 Foreign direct investments expect to attain. 7.8 billion euros in 2008, and to drop up to 7.4 million euros, in 2009, reads a Macroeconomic Summary by BCR Research Department.

An analysis of the investments structure, including activities of the national economy shows a rise in the weight of the investments in agriculture, namely from 1.6 percent in the first half of 2007 to 4.8 percent in the H1 of 2008, and in the industry, namely from 35.4 percent during the first six months of 2007 up to 36.3 percent during the same period in 2008.

In parallel, it happened a decrease in the weight of the investments in the trade and the services, in the total investments in the Romanian economy, which shows that the field reached a certain level of maturity, after the high growth rates scored in the latest years. Altering the investments structure can make the industry and the agriculture contribute much more considerably to the GDP and reduce the gap between the demand and the aggregated supply, in the future.

The industry's contribution to the economic growth has been constantly less than expected, while the insufficient supply has made the trade deficit wider.

BCR experts think that although the investments in the agriculture are not additionally detailed at the moment, their spectacular rise could be attributed to the foreign investors attracted by the traditional potential of the Romanian agriculture in the context of the soaring prices for the farming products worldwide.

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