BURSA 14.03.2017

Călin Rechea (translated by Cosmin Ghidoveanu)
 
mărește imaginea
     The signals on the domestic market, as well as the ones from the international markets, increasingly show us that the budget "fantasy" of the new government will be very costly for Romania, and the "price" that we are going to pay will become obvious sooner than we would have expected.
     The much vaunted macroeconomic stability will soon prove to have been nothing else but a period of apparent calm, amid the evolutions on the international markets, without a robust base for its preservation in the medium and long term.
     The headwind started even before the new budget was passed. As early as two years ago, a "decoupling" between the policy rate and the long term borrowing costs of the government has been observed.
     After the National Bank of Romania cut the policy rate from 2.75% to 2.5% in the first month of 2015, the average yield of 10-year government bonds fell to the historic low of 2.62%. The subsequent cuts have "helped" only the short term financing costs, while the yields of 5- and 10-year bonds have fluctuated while following a slightly rising trend and have reached a 2.5 -year high.
     To the state budget, the first serious warning signs came in Q4 2016, when the Treasury failed to raise any of the amounts scheduled in 4 auctions for government bonds, and in 13 auctions in 2016, the amounts raised were smaller than planned.
     2017 started off even worse. There have already been three failed auctions for the government bonds and three cases of where the amounts raised were smaller than planned.
     The latest failed issue was yesterday, for the issue with the ISIN RO1624DBN027, with a 2024 maturity and a coupon of 3.25%.
     Less than a month ago, in the same issue RO1624DBN027 the entire scheduled amount of 300 million lei was raised, at an average yield of 3.51%. In the previous auction, of November 2016, the amount raised was 154 million lei, while the goal of the auction was 300 million lei, at an average yield of 3.13%.
     The failure in the beginning of this week comes as last week saw a similar result for the primary market for government bonds. The Treasury sold nothing of the ISIN RO1620DBN017, with a February 2020 maturity and a coupon of 2.25%.
     On the same day, finance minister Ștefan Viorel said that "on every bond issue of the Romanian government there is an oversubscription, the yields are competitive, so there is no reason for concern".
     What is the situation on the primary market since the beginning of the year? According to data from the NBR, out of the 18 auctions held so far, only 14 have been oversubscribed.
     Doesn't the finance minister know this situation? And if he does, who is he trying to fool, himself or us?
     As for the significant depreciation of the leu against the Euro, minister Ștefan Viorel said that there are foreign factors that affect it, such as the policy of the Trump administration, the prospects of the EU or the Brexit, as well as internal factors, such as the comments on the country's stability and the policy of the NBR.
     "Perhaps it's the NBR itself that is trying to test the bearability limit and the devaluation that will be fixed within a very short time", finance minister said according to a piece of news by Agerpres.
     In order to get the central bank to return to a better mood and to stop these "tests", the president of the Chamber of Deputies himself has expressed his unconditional support for governor Mugur Isărescu, known by the code name "Manole".
     Probably because he was feeling connected to Mugur Isărescu, Liviu Dragnea stated that "the attacks against the NBR are affecting the exchange rate", and "an instability at the NBR causes a macroeconomic and financial instability".
     But how can one talk about stability when it all depends on one man or one institution?
     The stated support for the NBR governor will unfortunately not lead to the NBR being more sympathetic where the government's borrowing costs are concerned. Even if it wanted to lower the policy rate, the Romanian central bank is far too small to fight on two fronts, one of them represented by fearsome foreign forces, and the other by the irresponsible fiscal policy.
     Both on the internal and external front, currency market speculators represent the smallest danger, but that won't stop the authorities from turning them into scapegoats again.
     But even if the "speculators" from the domestic market can be "tamed" by the NBR, the evolution of the interest rates on the international markets will lead to increased pressures towards their raising on the domestic market as well, amid the continuation of the trend for the depreciation of the leu.
     The ECB economists have revised upwards the inflation forecast for 2017, after the official data for February 2017 showed an annual price increase of over 2% for most countries in the Eurozone.
     Following the recent macroeconomic data from the United States, Goldman Sachs analysts have reevaluated their forecasts concerning the raising of the policy rate. After the raise considered certain in this week's Federal Reserve session, there will be at least two other raises, in June and September.
     A JP Morgan economist thinks that the policy rate will reach a neutral level of 3% in 2019.
     Even the members of the Governing Council of the ECB have exchanged opinions on "the manner in which the exit from the unconventional stimulus package can be communicated" in the latest monetary policy session, and the options being reviewed include raising the reference rate before the end of the quantitative easing program, according to Bloomberg.
     At the end of last week, the return of 10-year US bonds was over 30% higher than in 2016, to almost 2.6%, and the return of Germany's bonds increased by almost 72%, to nearly 0.5%, according to data from Investing.com.
     Over the same period, the average yield of Romania's government bonds increased over 26%, to 4.15%.
     How long will the budgetary "fantasy" of the current government last and what explanations will it give its voters, when they ask how much longer do they have to wait for Godot? 
 

 
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