Romania

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S February 18, 2009

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 83 92. E-mail : rolf.danielsen@seb.se

Years of overheating driven by rapid credit growth and procyclical fiscal policies reached the tipping
point last fall and Romania risks a near term hard landing.


Country Risk Analysis

^ÑíÉê=óÉ~êë=çÑ=ëíÉää~ê=éÉêÑçêã~åÅÉ=íÜÉ=ÉÅçåçãó=ëäçïë=~ÄêìéíäóK==In 2008, grovll
acceIeraled lo 8,4° as agricuIlure recovered from drougll lle preceding year, and
lle domeslic demand boom conlinued inlo lle nev year buoyed by slrong exporls
and buIIisl senlimenl among inveslors and consumers. ReaI eslale conslruclion
sleamed forvard povered by generous credils from banIs parlicuIarIy in foreign
currencies incIuding lo louseloIds. As a resuIl lle economy venl inlo over gear,
crealing pressures in producl and Iabor marIels. Tle Ialler lad aIready ligllened
considerabIy due lo emigralion of job-seeIers lo IlaIy and Spain. Combined vill
Iong-slanding slrucluraI
infIexibiIilies Iabor slorlage
became acule and senl vage
demands soaring. Rising
domeslic price pressures
foIIoved and combined vill
ligl inlernalionaI fueI and food
prices lo drive infIalion inlo
doubIe digil lerrilory for severaI
monlls. ÷ Tlis came lo a
sudden laIl in lle faII as risI
appelile of inlernalionaI
inveslors pIummeled and
inlernalionaI Iiquidily aII bul
dried up. I n Romania, banIs
aImosl froze nev credils in lle Iasl fev monlls of lle year, rapidIy cooIing aclivily
in lle lousing marIel and slarpIy reducing imporl grovll. Tlal prevenled lle
lrade deficil groving oul of conlroI, Ieaving il al lle same IeveI reIalive lo GDI as in
2007, vlicl, lovever, sliII meanl a lefly 14°/GDI. WliIe deficils in previous years
used lo be aImosl fuIIy covered by foreign direcl inveslmenls (IDI), llal slare vas
dovn lo onIy laIf in 2008.
(long and medium term)
Bank loans to households
Foreign exchange, long term, households [ + Foreign exchange, medium term, households]
Lei, long term, households [ + Foreign exchange, medium term, households]
Source: Reuters EcoWin
2005 2006 2007 2008
R
O
N

(
b
i
l
l
i
o
n
s
)
0
10
20
30
40
50
60
Leu
euro etc

qÜÉ=ÑáëÅ~ä=ÇÉÑáÅáí=ÄÉÅçãÉë=~=ÅçåÅÉêå. Ior severaI years Romania prided ilseIf of
prudenl macro economic poIicies llal lad earned lle counlry an inveslmenl grade
raling vill inlernalionaI raling agencies. Tle fiscaI deficil lad been conlained veII
villin Maaslricll crileria, aIllougl slrong grovll lad faciIilaled llal resuIl. Bul
SEB Merchant Banking Country Risk Analysis June 21, 2008

2
2008 being an eIeclion year, poIilicians venl oul of lleir vay in promising generous
vage liIes for pubIic seclor empIoyees and a generous boosl lo pensions. Tlis nol
onIy fueIIed vage infIalion in lle economy al Iarge, bul combined vill oller
overspending and lax reduclions incIuding of VAT on food ilems lo send lle fiscaI
deficil onlo a rising lrajeclory. Al lle lime of lle generaI eIeclions in November, lle
deficil vas acceIeraling rapidIy refIecling lle unexpecled fronlIoading of pension
increases by lle oulgoing governmenl. In lle evenl, lle budgel ended in a deficil
of more llan 5° of GDI, more llan lvice as mucl as lle previous year and more
llan lvice as mucl as pIanned al lle beginning of lle currenl year.

táää=íÜÉ=åÉï=ÖçîÉêåãÉåí=íìêå=íÜÉ=íáÇÉ\= To slem lle ongoing delerioralion lo lle
fiscaI posilion, lle oulgoing adminislralion lad pul lle impIemenlalion of lle
previous parIiamenl decision lo liIe leaclers' saIaries by 50° as of Ianuary 2009 on
loId before il Iefl office. Hovever, despile llal encouraging sign of reneved fiscaI
prudence, many observers doubl lle incoming governmenl viII lave neiller lle
abiIily nor lle perseverance lo carry llrougl any significanl fiscaI reslrainl in 2009,
and llal lle budgel in lle besl of cases viII end in a nev deficil in Iine vill lle
resuIl of 2008. Recenl dala indicale pIunging lax revenues vliIe mosl spending
commilmenls conlinue. In addilion, lle nev poIilicaI silualion is compIicaled and
las nol basicaIIy clanged lle poIilicaI slaIemale caused by a fragmenled poIilicaI
Iandscape. Tle November 2008 eIeclion resuIled in a virluaI drav belveen lle
aIIiance of lle sociaI democrals (SID) vill lle conservalives (CI) and lle
democralic IiberaIs (DII) boll of vlicl von 33° of lle voles. Tle lvo vinners
formed a coaIilion governmenl vill a comforlabIe majorily in parIiamenl. WliIe llal
may sound promising, lle
underIying lensions among llese
unIiIeIy bed-males are paIpabIe, as
seen in lle exclange of serious
corruplion clarges. Iressures are
mounling for lle impIemenlalion of
lle poslponed vage liIes for
leaclers, vlicl in lurn viII lrigger
demands for simiIar raises for oller
groups of pubIic empIoyees.

táää=ãçåÉí~êó=ÅçãÉ=íç=íÜÉ=êÉëÅìÉ\=
In 2005, lle cenlraI banI adopled an
infIalion largeling monelary poIicy.
Despile lle peaIing of infIalion in
2008 al 8,4° as average for lle year,
lle generaI judgmenl is llal lle cenlraI banI las pursued llis poIicy vill some
success given lle difficuIl environmenl of a pro-cycIicaI fiscaI slance. Wlen lle
apprecialion lide lurned in mid-2008, lle cenlraI banI began lo liIe rales lo soflen
lle faII of lle exclange rale. Hovever, as llal proved insufficienl in O4, il aIso
inlervened for some $4 biII. in lle forex marIel, depIeling reserves by a lenll lo $34
biII.. Tley are sliII quile adequale in lerms of 5 monlls imporl coverage, bul
dvarfed by $17 biII. amorlizalion and some $30 biII. slorl-lerm Ioans faIIing due
over lle nexl 12 monlls.
Romania has made significant
strides in catching up with EU
income levels, but fast real
convergence has gone hand in
hand with growing macro
economic imbalances. Once EU
accession prospects looked
secure, foreign capital flooded
into Romania to take advantage
of perceived improvements in
investments risk and returns,
triggering an absorption boom.
(IMF 2008)

oáëáåÖ=êáëâ=çÑ=ëíê~áåÉÇ=äáèìáÇáíó. Tlal vouId nol be of mucl concern under normaI
circumslances, bul lle risI poinled oul by increasing numbers of observers is of
furller gIobaI credil cruncl and Iiquidily squeeze. Tlal risI is accenlualed by lle
danger llal some foreign parenl banIs syslem couId villdrav, afler laving

SEB Merchant Banking Country Risk Analysis June 21, 2008

3
financed more llan a llird of lle recenl credil boom. Noling llal foreign banIs
conlroI 90° of lle domeslic banIing syslem, lle resuIl couId be a generaI defauIl
silualion before Iong even llougl Romania is more soIvenl llan many peers.
LxlernaI debl slands al aboul 50° of GDI, Iess llan laIf lle IeveI of lle BaIlic
counlries. Oul of llal debl lle governmenl counls for onIy a minor parl, IiIe in lle
BaIlics. WliIe llis slouId miligale lle risI of an oulrigll sovereign defauIl in lle
near lerm, companies and louseloIds, are soon IiIeIy lo become financiaIIy
vuInerabIe. Tlal is nol onIy because of veaI income prospecls as economic aclivily
deceIerales slarpIy lo Iess llan 1° grovll in 2009 and perlaps 2010, bul aIso
because of lle sleep deprecialion of lle exclange rale, lurling companies and
louseloIds vill debl in euros and Sviss Iranc, represenling 56° of aII banI Ioans lo
lle privale seclor.

--´--

fåîÉëíçê=îáÉï=çå=oçã~åá~=Ü~ë=ÅÜ~åÖÉÇ=ëÜ~êéäó=íç=ÄÉ~êáëÜ=ãççÇ=áå=êÉÅÉåí=íáãÉë=
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Åçìåíêó=Äó=ëÉîÉê~ä=åçíÅÜÉë=Ñêçã=ÇÉÅÉåí=áåîÉëíãÉåí=Öê~ÇÉë=áåíç=ëéÉÅìä~íáîÉ=Öê~ÇÉëK==
táíÜ=íÜÉ=çåÖçáåÖ=ÇáÑÑáÅìäí=áåíÉêå~íáçå~ä=äáèìáÇáíó=~åÇ=ÅêÉÇáí=ëáíì~íáçå=oçã~åá~=
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~í=êÉ~ëçå~ÄäÉ=ê~íÉëK==tÜáäÉ=êÉëÉêîÉë=ëÜçìäÇ=ëìÑÑáÅÉ=íç=ÅçîÉê=êÉä~íáîÉäó=ãçÇÉëí=
ÖçîÉêåãÉåí=ÑçêÉáÖå=ÇÉÄí=ëÉêîáÅÉ=~åÇ=~=ê~éáÇäó=ëÜêáåâáåÖ=íê~ÇÉ=ÇÉÑáÅáí=áå=OMMVI=íÜÉ=
çåìë=ïáää=ÄÉ=çå=íÜÉ=éêáî~íÉ=ëÉÅíçê=íç=ãÉÉí=áíë=çÄäáÖ~íáçåë=áå=~å=ÉåîáêçåãÉåí=çÑ=
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ÄÉäáÉîÉ=íÜ~í=áåÅêÉ~ëÉë=íÜÉ=ÖÉåÉê~ä=Åçìåíêó=êáëâ=ãçêÉ=ëíÉÉéäó=íÜ~å=íÜÉ=ëçîÉêÉáÖå=êáëâK==

Key ratios 2009
IopuIalion (miIIions) 21
GDP/capita ($) 7201
GDP (change) 0,6%
Inflation 4,1%
Curr.acc. balance/GDP -12%
Reserves/imports (months) 4,4
Budget balance/GDP(*) -5,2%
Government debt/GDP(*) 14%
Graph: The graph shows Romania as relatively strong on
resilience -- i.e. good long term factors, compared with
many peers, while weakness is on the macro balance.
Event risk is high but milder than in Ukraine.
bñíÉêå~ä=ê~íáåÖëW=
Iilcl: BB+/NLG
S&I: BB+/NLG
mÉÉêëW
UIraine
Ialvia
Russia
0
2
4
6
8
10
12
Resilience
Liquidity
Information
Absence of
event risk
Macro balance
Romania Ukraine

i~íÉëíW=oçã~åá~=~ëâë=Ñçê=fjc=ëìééçêí=
In Iale Iebruary lle governmenl opened discussions vill lle IMI for a possibIe IMI
program and credil faciIily vill lle aim lo leIp lle counlry meel an onerous near lerm
debl service. Sucl a program is IiIeIy lo pul a ligll Iid on fiscaI expendilures and Iimil any
saIary increases in 2009. Tlal slouId leIp boIsler inveslor senlimenl, easing lle refinancing
of Romania's foreign debl and lle financing of lle conlinued exlernaI currenl accounl
deficil. Tlis is a posilive deveIopmenl, bul does nol clange our overaII risI assessmenl
before ve see lle counlry abIe lo carry an IMI-Ied auslerily program lo ils successfuI
concIusion.


SEB Merchant Banking Country Risk Analysis June 21, 2008

4

Key data: 2004 2009 2010 2005 2006 2007 2008 2011
GDP (mill. US$) 75954 98397 123679 167423 193400 153016 179852 207617
GDP/capita (US$) 3496 4550 5744 7810 9061 7201 8505 9867
GDP (change) 8,4% 4,2% 7,9% 6,0% 8,0% 0,6% 0,8% 2,3%
Investments/GDP 21% 23% 26% 31% 35% 35% 38% 41%
Budget balance/GDP* -1,5% -0,8% -1,5% -2,3% -5,1% -5,2% -4,8% -4,2%
Govt debt/GDP** 19% 16% 13% 13% 13% 14% 13% 15%
CPI inflation (%) 11,9% 9,0% 6,6% 4,8% 7,8% 4,1% 3,0% 3,6%
Money demand (%) 34,8% 40,2% 26,7% 28,6% 30,5% 8,5% 10,5% 10,5%
Stock prices 2094 3514 4676 6296 4041
Interest rates 20,3% 9,6% 8,4% 7,5% 9,5% 8,0% 5,6% 5,3%
Exch. Rate ($) 3,26 2,91 2,81 2,44 2,52 3,37 3,22 3,22
Trade/GDP (%) 71% 66% 65% 63% 69% 86% 79% 76%
Oil price (Brent) $38 $54 $65 $73 $98 $45 $60 $74
Millions US $
Export of goods 23 551 27 647 32 485 40 315 51 999 55 332 61 757 68 860
Imports of goods 30 213 37 252 47 368 64 542 81 073 76 363 81 211 89 949
Other: 288 1 107 2 027 922 1 724 1 981 1 666 2 050
Current account -6 374 -8 498 -12 856 -23 305 -27 350 -19 050 -17 788 -19 038
(% of GDP) -8,4% -8,6% -10,4% -13,9% -14,1% -12,4% -9,9% -9,2%
FDI 6 362 6 464 11 009 9 664 13 939 6 660 6 398 6 126
Loan repayments -8 991 -11 839 -16 367 -22 125 -25 893 -28 797 -31 731 -34 665
Net other capital flows 12 955 20 915 24 353 44 362 44 246 33 035 47 738 54 444
Balance of payments 3 952 7 042 6 140 8 596 4 943 -8 152 4 617 6 867
Reserves 11 039 18 081 24 221 32 817 37 759 29 607 34 224 41 090
Total debt 26 972 35 516 49 100 66 375 77 678 86 390 95 192 103 994
o/w short term debt 3 680 6 413 13 939 24 980 32 825 34 025 35 851 37 412
Sources: Oxford Economics and SEB estimates.
Rating history

Fitch (eoy) BBB- BBB- BBB BBB BB+
S&P (eoy) BB+ BBB- BBB- BBB- BB+
Type of government: Parliamentary Democracy
Next elections 2012
Other:
Latest PC deal NA
Latest IMF arrangements SBA 2004



Consumer Prices
Source: Reuters EcoWin
1996 1998 2000 2002 2004 2006 2008
P
e
r
c
e
n
t

p
a
.
100
125
150
175
200
225
250
275
300
Stock exchange
Source: Reuters EcoWin
2000 2004 2008
I
n
d
e
x
0
2000
4000
6000
8000
10000
Romania, Spot Rates, Close
EUR/RON USD/RON
Source: Reuters EcoWin
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
EUR/RON 4,2885
USD/RON 3,334
Interbank rates
Source: Reuters EcoWin
2008 2009
%

p
a
.
5
10
15
20
25
30
35
40
45
50
55

SEB Merchant Banking Country Risk Analysis June 21, 2008

5

aáëÅä~áãÉê=

`çåÑáÇÉåíá~äáíó=kçíáÅÉ=

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