Ladies and gentlemen,
I am honoured to welcome you all at the National Bank of Romania. Today we are hosting the conference of the European League for Economic Cooperation (ELEC) that will focus on the challenges faced by the Eastern European countries, their place and role within the European Union.
It is already a tradition for the National Bank of Romania to host an ELEC conference. We are pleased to be in a strong partnership with ELEC and we are committed to keeping it that way in the future.
Allow me to greet Professor Deac, President of ELEC Romania; Baron Bernard Snoy, President of ELEC International; Jerry van Waterschoot, Secretary General of ELEC International, as well as guests from the European Commission, the European Fund for Strategic Investments, from the national banks of Austria, Hungary, from Bulgaria, from numerous commercial banks and from the academic environment.
ELEC is a prestigious organization represented in a large number of EU countries, including Romania. ELEC has built during its long existence a European network of experts in the economic and financial field. Given its prominent role in strengthening ties within the EU, ELEC has an advisory status at the Council of Europe and at the United Nations Economic Commission for Europe.
Ladies and gentlemen,
Now a few words about the topics under debate today.
Romania’s accession to the North Atlantic Treaty Organization (NATO) in 2004 brought security, made Romania more attractive to foreign investors and paved the way for the next big step: joining the European Union (EU) in 2007.
The international crisis erupted in 2008, soon after we had become a member of the EU, and the previously fast-expanding Romanian economy and financial sector underwent severe adjustments. Nevertheless, our country continued its convergence to the EU throughout the crisis. The GDP per capita at Purchasing Power Standards (PPS) increased from 34% of the EU average in 2004 to 43% in 2007 and up to 57% in 2015, according to Eurostat data. Convergence is not only a goal in itself, but the best way to analyse the success of our efforts – as reforms are being translated into welfare. The resilience of the convergence process even during the worst crisis in the recent history of the EU – as it unfolded – while other countries have diverged, is proof of the overall progress of the Romanian economy. Compared to the pre-accession period, the Romanian economy is now more developed and more resilient to shocks, growth is more robust, the structure of the economy is changing in favour of services and more value-added industrial production, the current account deficit is smaller and easier to finance, inflation is subdued, and interest rates are at record lows.
However, this convergence process is unbalanced. The fruits of growth are unequally distributed, and this may create tensions. We should not underestimate the relevance of inequality – even for central banks. Inequality matters for the transmission of monetary policy to the economy because the marginal propensity to consume, which determines households’ responses to a change in interest rates, varies with income.
While GDP is slowly, but steadily, converging towards EU averages, the budget revenues are not. Having the lowest budget revenues in the EU, and even declining as a share in GDP, also affects the level of public spending, given the hard budgetary constraints.
We are far from realizing our potential. The large emigration coupled with a low unemployment and a low employment rate at the same time, and the long-delayed critical infrastructure works, represent not only a loss of current output, but also an unrealized potential output.
Now, let me refer to the banking sector, which in my opinion should be the catalyst for further sustainable convergence.
The National Bank of Romania is fully aligned to the European model of central banks. The NBR is an independent central bank, member of: European System of Central Banks, European Central Bank (General Council), European Systemic Risk Board, European Banking Authority, resolution colleges of the Single Resolution Board. Representatives of the NBR are members in more than 100 different committees and working groups on financial sector issues at the European level.
Moreover, the domestic banking system is highly integrated into the European one. Over 90% of total bank assets are owned by foreign investors, mostly European ones (as of March 2017). Banks are adequately capitalized, with the total capital ratio at 18.3% in December 2016, similar to the EU average (18.3% in September 2016, EBA). Banks’ liquidity position is favourable, as well. The loan-to-deposit ratio is amongst the lowest in the EU (79% in 2016, below the EU average of 118.4%). The Liquidity Coverage Ratio (LCR) is one of the highest in the EU (230% in 2016, in comparison to the EU average of 141.1%). The funding structure has improved after the crisis, as external resources were replaced by local deposits, more stable and denominated primarily in local currency. The NPL ratio declined to 9% (as of March 2017), but it remains above the EU average (5.1% in December 2016). However, banks mitigated the credit risk by provisioning non-performing loans to a large extent. According to data provided by the European Banking Authority (EBA), the Romanian banking sector has the highest NPL coverage ratio in the EU (65.8% in December 2016 against the EU average of 44.6%).
On the other hand, there is still a lot of progress to be made with respect to the total assets held by banks and to financial intermediation. Total banks’ assets amount to 56.3% (December 2016), lagging behind our peers and the EU average (267%, September 2016). Financial intermediation (bank credit/GDP) declined from 34.5% of GDP in 2007 to 28.2% of GDP in 2016. The EU average in 2016 was 122.8% of GDP (EBA). The removal of bad loans from banks’ balance sheets over the past years and the choice of some non-financial corporations to borrow from non-resident financial institutions partially explain the decline in financial intermediation.
Low financial intermediation coexists with abundant liquidity, having many of the features of the liquidity trap, with low interest rates and limited supply of safe assets. The preference for liquidity usually goes hand in hand with disintermediation. The M1 monetary aggregate has doubled since 2009. Money velocity dropped from 3 before the crisis to 2.4 last year. The preference for liquidity affects investments and reduces potential output by decreasing the return on investments. It also affects the structure of economic growth, as it is correlated with a higher marginal propensity for consumption. There is a fundamental contradiction between the preference for liquidity and our need to catch up with more advanced economies. We have to put money at work – as banks should restart the engine of credit to companies. The capital market is also very thin.
Having said that, the banking sector should be the catalyst for further convergence, by providing long-term funding to the real economy, mainly to corporates.
Ladies and gentlemen,
Romania has been converging, even as the crisis unfolded. But we are still far from realizing our potential. The banking sector is also not realizing its full potential – as too high solvency ratios and excess liquidity indicate that some resources are not used.
Brexit changes many things. But we are facing more than a Brexit. We have to deal with Glexit – an exit from globalization, as we knew it, or at least from its discontents.
Europe is redefining itself nowadays. It should not do so in competition with any other nation. It should not isolate itself, and it should not discriminate among its members. When there is much external uncertainty, our first duty is to keep our house in order and to maintain the sense of direction. In a year and a half from now, Romania will have the Presidency of the EU. From that position, we must contribute to the future of Europe debate. I believe this conference is a step towards forward-looking strategic thinking.
I wish you very fruitful debates today!
8 Iunie 2017