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ROMANIA


 

 

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Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 60,358 44,428 38,700 52
         
GNI per capita
 US $ 2,310 1,850 1,720 100
Ranking is given out of 208 nations - (data from the World Bank)

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Update No: 161 - (27/10/10)

Romanian woes
Banks in many of the emerging economies of Central and Eastern Europe appear to be on the mend after a deep and painful recession. But in Romania, one of the region’s poorest countries, financial institutions are still struggling to see beyond the back of a mountain of troubled loans. Several years of bumper growth fuelled by cheap credit came to an end last year after a real estate bubble burst and the Romanian economy contracted by 7.1 per cent.

Now, austerity measures that were implemented under the country’s €20bn ($27.7bn) standby agreement with the International Monetary Fund are set to cause the economy to contract by a further 1.9 per cent this year, delaying the recovery until 2011.

As non-performing loans continued to pile up, the banking sector’s return on equity slipped into negative territory in the second quarter of 2010, meaning that institutions had to set aside large provisions.

The non-performing loan ratio (loans and interest classified as doubtful or worse as a percentage of total loans) rose to 17.8 per cent, compared with 11.8 per cent a year previously.

Big-scale becomes small-scale bankruptcy
Retail borrowers are struggling, obliging banks to restructure repayment schedules, and there are concerns about possible second-stage effects linked to the falling price of property collateral. But bankers say the real problem area remains the corporate sector – particularly, small and medium-sized businesses, whose struggle to repay their debts has been exacerbated by the public sector failing to pay its bills on time.

“We are still seeing some issues with SMEs who are subject to cash flow issues. But state arrears must be paid as part of Romania’s IMF agreement and if that happens the SME situation will be alleviated somewhat,” says Dominic Bruynseels, chief executive of BCR, the country’s largest bank, which was acquired by Austria’s Erste Group in 2006 in a €3.75bn deal.

BRD-Groupe Société Générale, Romania’s second-biggest bank, argues that although non-performing loans have not yet peaked, the situation is manageable. “Romania is not Greece but it’s not possible to say yet that the recovery has started,” Guy Poupet, chief executive, says.

The Austro-Hungarian afterhang
BCR and BRD remained profitable in the first half, but others fared less well. For example, the Romanian subsidiary of OTP, Hungary’s biggest bank, fell to a Ft2.1bn ($10.6m) first-half loss after credit portfolios deteriorated quickly in the second quarter, mainly due to corporate loans going bad and provisioning costs trebling.

“The bleak macroeconomic environment increases the risk of higher impairments in the coming quarters,” the bank said.

As Romanian banks reassess credit risk, lending has tightened, depriving companies of much-needed finance.

“Competition for lending to large well-established companies, especially in the export sector, has intensified, while SMEs – particularly if they have a short track record – have found it difficult to find bank financing,” says Tonny Lybek, IMF resident representative.

Mr Bruynseels at BCR insists that banks are “not starving SMEs of finance. What we are doing is being realistic about the chance of SMEs getting through the period; for those we think can, we are supporting them”.

Yet Romania’s banks appear well protected against any future shocks with an average tier one capital adequacy ratio – which measures the cushion of capital banks must hold – of 14.3 per cent.

The central bank’s provisioning rules are considered extremely stringent, while its €31.5bn in foreign exchange reserves are expected to provide a solid backstop in the event of renewed market turbulence.

Moreover, in contrast to neighbouring Hungary, the problem of foreign currency lending looks much more manageable.

The share of forex lending in Romania reached almost two-thirds of total credit before the onset of the financial crisis. But although the leu, Romania’s currency, depreciated by more than 15 per cent against the euro in the immediate aftermath, it has since traded within a relatively narrow range.

So far foreign parent banks, which control 90 per cent of Romania’s banking system, have broadly maintained their exposure to the country.

However, analysts remain concerned about Greek banks’ role in the sector – these account for about 15 per cent of Romanian banking assets.

“This is not a time to be naive and think everything is rosy and shiny – it’s a tough time. But we believe the Romanian banking system is in a good position to weather the storm,” says Robert Rekkers, chief executive of Banca Transilvania, the largest private locally owned Romanian bank.