Wednesday, July 2, 2008

Romanian Producer Prices Shoot Up While New Forex Loans Slow

Romanian producer prices rose at the fastest annual pace since November 2004 in April as rising energy prices and a weaker local currency increased the cost of imported materials. The cost of goods leaving Romanias factories and mines rose at an annual 16.8 percent rate in May, compared with 15.5 percent in April, according to dat from the National Statistics Institute today. Prices rose 1.7 percent on the month, after a gain of 1.1 percent in April.




The leu has weakened almost 15 percent against the euro in the past year, making imports of capital goods and raw materials more expensive. Higher global energy prices also increased costs for producers. Producer-price growth is an early indicator of inflation, which in May was 8.5 percent, more than twice the pace of the euro region.

Prices of manufactured goods rose an annual 19.6 percent in May, compared with 17.7 percent in April, while price growth in the mining and drilling industries slowed to 11 percent from 13.2 percent. The costs of electricity, natural gas and water rose an average of 3 percent, compared with 2.9 percent in April, the statistics institute said.

In another indication of the growing stresses and strains which are now accumulating in the Romanian economy, we learnt today that overdue private debt almost doubled in April from a year earlier as the local currency weakened, making loans in euros more expensive to repay. Loan payments that are more than 30 days overdue rose to 691 million lei ($300 million) in April from 380 million lei a year earlier, according to the Banca Nationala a Romaniei.

Private debt in Romania rose an annual 61.3 percent in May from a year earlier in a lending boom spurred by rising wages and competition among banks, the central bank said on June 24. Borrowing in euros accounted for most of the lending.



In May 2008, non-government credit grew 1.8 percent, or 1.3 percent in real terms, versus April 2008 to RON 171,834.3 million. RON-denominated loans went up 2.4 percent (1.9 percent in real terms) and foreign currency-denominated loans rose by 1.4 percent when expressed in RON and by 2.9 percent when expressed in EUR. At end-May 2008, non-government credit climbed year on year by 61.3 percent, or 48.8 percent in real terms, on the back of the 41.7 percent increase in RON-denominated loans (30.6 percent in real terms) and the 82.6 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 65.0 percent).

If we look at the annual rates of increase in loans and forex loans (see chart below) we can see that the rate of increase in RON denominated household has been falling slowly now for some time, but that the rate of increase in Total Forex loans and Household Forex was very very fast, but peaked in January, and is now declining. This could mean that the lending boom has now past its peak, and that we are into the downside, if so we should start to see some reflection of this in real economy data in the not too distant future.



Posted by Edward Hugh at 12:33 PM

0 comments:

Post a Comment

Subscribe to: Post Comments (Atom)

Spotlight On Hungary

Welcome to the Eastern Europe Economy Watch Blog. By clicking the older posts link (at the foot of the page) you will be able to leaf through the normal chronological blog posts. But first we have our country of the month feature where we would like to present some charts which provide background data we hope will help the first time reader better assess and get to grips with the general argument being presented on the blog. Below you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.