Annual Report 2010 - ProCredit Bank

Political and Economic Environment
In 2010, the Romanian economy remained hampered
by the downturn that started in October
2008, albeit less severely. GDP still fell by 1.2%,
but this was a considerable improvement over
2009’s 7.1% decrease. Some economic sectors
continued to decline sharply, such as construction
(-7%) and agriculture (-1%). The country’s
slightly better economic performance in 2010
was mainly due to industrial sector output, which
managed to achieve an increase of 5.8%. However,
the deep recession, paired with austerity
measures, stalled recovery. There was not much
that the government could do to stimulate economic
recovery, as the country has a ballooning
budget deficit and a sub-investment grade rating.
The projections for 2011 are more optimistic,
as the economy is expected to recover and grow
by 1-2% by the end of the year.
During the first weeks of 2011, Romania received
the eighth tranche of the nine-tranche IMF Stand-
By Agreement, bringing the total amount borrowed
from the IMF to EUR 12.2 billion. The disbursement
of the tranches sent positive signals
in the markets, as the government was able to
meet the IMF’s requirements regarding budget
deficit levels and central administration arrears.
The country’s budget deficit in 2010 was 6.5% of
GDP, while the IMF target was set at 6.8%.
In order to meet these requirements, the government
had to take some unpopular measures
during 2010, such as increasing VAT from 19% to
24% and cutting central administration salaries
by 25%. These measures led to a further contraction
of GDP as well as to political instability,
as the opposition did not support the austerity
measures implemented by the governing party,
which has only a narrow majority in parliament.
Furthermore, Romania’s admittance into the
Schengen Area was postponed, which tarnished
the image of the government both internally
and externally.
On a brighter note, the previous two years of
economic downturn had positive effects on the
current account deficit. During 2010 net imports
continued to decrease, amounting to EUR 6.6 billion
(down from EUR 7.0 billion in 2009). However,
the level of the current account deficit increased
slightly from EUR 5.1 billion to EUR 5.2 billion,
due to the fall in incomes and money transfers
from abroad.
The limited current account deficit, coupled with
IMF and EU funding, nevertheless allowed the
National Bank of Romania (NBR) to renew investor
confidence by stabilising the RON against the
major currencies. The inflation rate rose to 7.96%
by year-end, overshooting the National Bank’s
target of 3.5%. Due to the macroeconomic developments
of 2010, Romania will most likely not be
able to adopt the euro in 2015, as was initially
planned. Joining the ERM II is still under debate
and seems to be a distant target.
Financial Sector Developments 1
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The number of banks and non-bank financial institutions
in Romania, which stood at 42 and 228,
respectively, was nearly identical to the previous
year; one new, 100% Romanian-owned bank
went into operation. The top five banks held 53%
of total sector assets, while foreign ownership
held 85.1%.
The Romanian banking system did not require
support from the government in 2010. However,
the shareholders of the banks brought in additional
capital in order to accommodate regulatory
pressures and to compensate for the losses
incurred during 2010.
Total banking assets contracted for most of 2010,
but started to pick up again in the second half of
the year due to increased government borrowing,
which grew by 31% to RON 61.6 billion. As a
consequence, total assets as of end-2010 stood
at RON 341 billion, 3.53% greater than the corresponding
figure for 2009. Lending to the private
sector demonstrated far lower growth of 4.70% 2
to RON 209.3 billion 3 (EUR 48.8 billion) due to
1 Unless otherwise stated, all of the figures cited in the
Financial Sector Developments section were taken from
National Bank of Romania, “Statistical Report”, December
2010.
2 National Bank of Romania, “Structure of Deposits and
Loans”, December 2010.
3 Ibid.