Jeffrey Franks: Romania will experience economic recovery in the second half of the year

• The head of the IMF: "I"m not asking the Finance Ministry to pay the bills of the CNVM, but I"m asking them up to come up with a legal solution to the problem that the latter is faced with"

Reporter: You have announced that the Romanian authorities will begin the privatization of state owned companies this year, including "Nuclearelectrica" and "Hidroelectrica". The two companies were not on the initial list of companies to be privatized. What will the sale process consist of?

Jeffrey Franks: In our talks with the Government we have agreed to have the list of companies to be privatized include minority stakes of "Hidroelectrica" and "Nuclearelectrica".

We will provide the government with counseling on the sale, but I think the key option would be to look for a strategic investor, which would take over a minority stake. Another alternative would be to list them on the Stock Exchange.

Reporter: Has a deadline been set for the privatization of "Nuclearelectrica" and "Hidroelectrica"?

Jeffrey Franks: I think it is realistic to think of a period of 12 months. "Petrom" is the first company that will go through this process (ed. note: this year the Romanian state will sell an additional 9.84% stake of Petrom on the Bucharest Stock Exchange), followed by "Transgaz", "Romgaz", "Transelectrica" and maybe later "Hidroelectrica" and "Nuclearelectrica".

Reporter: The Romanian National Securities Commission was forced to compensate the investors who lost their money in the National Investment Fund (FNI). There are rumors that the IMF has urged the Ministry of Finance to take this burden off the shoulders of the CNVM. What is the position of the IMF on the matter?

Jeffrey Franks: This matter is very important. Romania can"t afford not to have a functional capital market, especially when trying to privatize state owned companies. You can"t have a functional capital market without having a market regulator. The current court rulings against the Romanian National Securities Commission, would prevent its functioning.

CNVM would no longer be able to pay its employees, therefore a solution needs to be found to this problem. I don"t have an opinion on the legal specific decision concerning the FNI, because I did not participate in this kind of discussions.

I am not asking the Ministry of Finance to pay the bills of the Romanian National Securities Commission, but I am asking them to find a legal solution to the issue that they are being faced with.

Reporter: Have you set a deadline for them?

Jeffrey Franks: There is a deadline for this, it is something that needs to be done.

Reporter: What are the monetary policies that the NBR should apply to target the inflation for 2012?

Jeffrey Franks: The inflation was complemented by exogenous shocks, which were outside the control of the National Central Bank. What the Central Bank needs to do is to make sure that these shocks won"t lead to a generalized increase in prices.

In order to do that, the NBR should look at the inflation forecast and, if it too big for 2012, it should adjust in the coming months. There are various mechanisms that the NBR can use to do that: the exchange rate intervention, "open market" operations, the changing of the policy rate or the change in the level of minimum mandatory reserves. The NBR should look at the issue, at the set of measures that it has available and needs to make a decision on the best solution. I will not dictate the measures that they need to take, but the danger of inflation has obviously increased, compared to what it was when I last visited Romania. That is why, the Romanian Central Bank needs to be ready to tackle the issue if necessary.

Reporter: How would you comment on the statements that claim that the NBR intervened on the exchange rate to keep inflation in check?

Jeffrey Franks: The Romanian Central Banks intervene from time to time on the currency market and there is nothing wrong with that. The interventions are done to reduce the volatility of the exchange rate, or to move the exchange rate in a certain direction to control inflation. This is a decision which is part of the monetary policy and is up to the National Central Bank.

Reporter: Do you think that the strengthening of the leu has helped inflation go down?

Jeffrey Franks: Economic theory shows the appreciation of the exchange rate helps lower inflation, but we need to be realistic. The appreciation of the leu was rather small, meaning that its effect on inflation will be small as well. You can"t rely exclusively on the exchange rate alone to lower inflation, because that also affects competitiveness.

Reporter: Do you think that the number of non-performing loans will reach its maximum in the second half of the year?

Jeffrey Franks: I think it will reach a peak by mid-2011. We are expecting that.

Reporter: How will this affect the banking system?

Jeffrey Franks: Once the number of non-performing loans is reached, and it starts going down, this will allow the banking system to relax a bit. Once the peak is reached, this will be good news for the economy, because banks will resume lending again.

Reporter: What is you opinion on the intention of the NBR to restrict lending in foreign currencies?

Jeffrey Franks: The excessive use of currencies denominated in other currencies is risky for an economy. It is very appropriate that the officials of the Central Bank are considering this thing, as part of the prudential regulation of the financial sector. We need to see the exact measures that the NBR will take. In principle, it"s a good idea.

Reporter: Will the banks need to pursue special steps, given the increase in the number of non-performing loans?

Jeffrey Franks: What the banks did so far was creating provisions for non-performing loans. Romanian provision requirements are very strict. Internally banks are restructuring certain loans in order to have them perform, and in some cases they are very good at collecting collaterals. There is no need for the government to intervene in this process because it is working very well and since the provisions requirements are very strict, there is a feeling of confidence. Even if the number of non-performing loans is big, there are no risks of a financial crisis.

Reporter: Do you think that the minimum required reserves should remain at the current level?

Jeffrey Franks: Given the inflationary pressures that we are facing now, I don"t think that there is room to lower them.

Reporter: What is your outlook on this year for the banking sector?

Jeffrey Franks: Lending will pick-up slightly in the second half of the year. We could see a move from negative growth in lending into positive territory this year. I am expecting the banking system to get from the "break even" of these past few months, to a profitable one, in the coming months. This means that we would be exiting the stage of financial difficulties.

Reporter: When do you think that Romanians will feel the effects of the economic growth?

Jeffrey Franks: I think that Romanians are already feeling that effect, because exports are doing very well. Let"s hope this success will extend to the rest of the economy. It is a gradual process. The unemployment rate is down, which is good, but the pace at which new jobs are being created is still slow. Romanians will feel the economic recovery when the number of jobs will increase and when the economic activity will allow them to consume and invest. I think that this will happen in the second half of the year.

Reporter: What are the progress that you expect Romania to make in the coming three months?

Jeffrey Franks: There is a very ambitious agenda to reform state owned companies. We want to check the progress of this process every three months. We are expecting to see improvements in the process to reform state owned companies. Specifically, the Government will work on actions plans. Some companies will be restructured in this round, and others will be restructured in the next. The process needs to move forward in the case of companies where stakes need to be sold and where management needs to be privatized. We are expecting to see progress in the fiscal sector three months from now. We have discussed with the Government the draft for the 2012 budget and we have drafted the steps that need to be taken to reach the 2012 target.