Analysts Expect BNR To Encourage Lending

Marian Anton

• First step would be to reduce forex mandatory minimum reserves

The Board of Directors of the National Bank of Romania (BNR) could decide today to reduce the mandatory minimum reserves to allow a much-coveted revival of commercial lending, banking analysts said. Nicolae Chidesciuc, Chief Economist of ING Bank Romania, believes that a potential reduction of the minimum reserves would only concern forex-denominated reserves, while the RON-denominated reserves would most likely remain unchanged. "The reduction of the RON-denominated reserves should also take place soon," Chidesciuc added. "The minimum reserves should be decreased in order to increase market liquidity. More liquidity would lead to lower interest rates and therefore to stronger lending maybe two or three quarters after BNR"s decision," Chidesciuc added.

According to him, Romania cannot afford to wait for a lending revival and needs to stimulate it as soon as possible. A decrease in the forex-denominated reserves would put decrease the pressure on the RON. In future, a possible reduction of the RON-denominated reserves would have the opposite effect and increase the pressure on the RON, which is anyway unavoidable, Chidesciuc added. While a reduction of forex-denominated reserves can stimulate forex-denominated loans, a future reduction of the RON-denominated reserves would have a dual impact on lending: stimulate RON-denominated loans and depreciate the RON through increased monetary mass. The effect of the latter would be smaller forex-denominated lending.

In Chidesciuc"s opinion, the good timing of the reduction of the minimum mandatory reserves is confirmed by the recently signed loan agreement with the International Monetary Fund (IMF), which has made BNR more comfortable. Moreover, the agreement ensures a coherent fiscal policy and a better grip on public spending.

Dragos Cabat, President of the Romanian Financial Analysts Association, believes that BNR is likely to reduce forex-denominated reserves and maintain RON-denominated reserves unchanged. A reduction of the mandatory minimum reserves can take place through changes in their structure, that is, by excluding long-term resources from the calculation formula of the mandatory reserves. For example, if the long-term resources are removed from the formula for forex-denominated reserves, 40% of the forex-denominated reserves for long-term loans can return to the commercial banks, Cabat explained. He added that, although the National Bank would be cautious until the actual disbursement of the IMF money (available as of 6 May), Governor Isarescu may want to start a lending stimulation strategy beforehand.

Any change to the minimum mandatory reserves will be anyway symbolic - only to suggest a trend, according to Florin Ilie, Capital Markets Director with ING Bank Romania. He believes that changes will take place gradually, very cautiously, because of the high degree of uncertainty as to the effects of these decisions of the National Bank of Romania. He stated a reduction of the mandatory reserves would lead to monetary relaxation, which can lead to smaller interest rates, because the cost of financing would decrease. However, the mandatory minimum reserves instrument is a monetary policy instrument that can solve a liquidity problem, not a risk problem, which is typical of the Romanian banking system, Ilie added.

No one can be certain as to the short-term consequences of a reduction in the mandatory reserves, Ilie added. He explained: "The very poor country rating and the very high risk level of the Romanian economic environment are problems that cannot be solved through the mandatory minimum reserves. The interest rates will therefore not decrease spectacularly. The IMF agreement is the only reason why BNR can afford to consider reducing the mandatory reserves, which is anyway only a monetary policy decision that needs to be accompanied by proper fiscal policies, which need to solve the consequences of the pro-cyclic policies of the last few years, when Romania achieved significant economic growth."

Tradus de Andrei Năstase