FLASH LETTER TREASURY DIVISION May 31, 2006

Romania's Board Money (M2) supply reached RON 88,034mln at the end of April, increasing by 0.6% (0.2% in real terms) m/m and by 27.4% y/y (19.2% in real terms). The net foreign assets decreased for the third month in a raw to the equivalent of RON 44,925mln, dropping by 1.1% m/m, although the value of the gold component grew by 4% m/m, revealing the expectations of the market for further appreciation of RON against the hard currencies. Moreover, the domestic assets increased to RON 43,109mln, up by 2.4% vs. March. During April, the domestic credit diminished its growing pace to 2.6% m/m vs. 5.9% in March, amounting to RON 58,910mln, as the non-governmental credit posted a 3.7% m/m to reach RON 68,124mln. On yearly bases, the credits to nongovernmental accelerated by 51.6% y/y (41.7% in real terms), due to the fast expanding RON denominated loans which soared by 95.7% y/y (83% in real terms), while the forex lending advanced by 22.3% y/y (27.4% in real terms). Credit growth comes in the context of household's fast desired convergence to the EU standards of living, improved macroeconomic conditions and better access to credits due to strong competition in the banking system. Although lending advanced sharply since 2002, it is premature to foresee any major imbalances, as in 2005 the non-governmental credit represented only 21.1% of the whole year gross domestic product. The National Bank managed to diminish the fast advance of the forex lending by increasing gradually the ratio of the minimum requested foreign exchange denominated liabilities up to 40%, while the minimum compulsory reserve for local currency stands at 16%. The NBR stimulated the switch of the credit demand towards the domestic lending to increase the efficiency of the monetary policy. At present, the key rate stands at 8.5%, outpacing by 1.6 percentage points the headline inflation; however the savings (quasi-money) in Romania remained modest at RON 63,441mln in the first four months of 2006, even decreasing by 0.4% m/m. Worried by inflation and worsening current account deficit, the NBR might proceed soon to even more restricting measures to smoothen the acceleration of the RON denominated loans, as the debt flows resulted mostly in consumption and less in viable investments.



In Romania, the consumer credit has been the main driver behind the current boom of lending, especially in the individual's demand. The drop of interest rates, as well as the increasing competition among financial institutions resulted in laxer access to credit market and therefore the level of households' indebtedness advanced to 8.5% of GDP in 2005 vs. 4.7% in 2004. In January-April 2006, the consumer credits covered 78% of the overall indebtedness of population, while the mortgage loan was lacking steam because of the high level of minimum required advance of 25%, one of the highest in Europe. Therefore, the lending market developed atypically as compared to other European countries, where the mortgage credits lead aloofly the credit flows. According to the latest monthly report of the European Central Bank (ECB), the mortgage lending represents 70.2% of the total outstanding loans to households in the Euro Zone (EZ). As a percentage of GDP, mortgage credit accounts for 5% in the Central Eastern Europe (CEE), much below the 37% level recorded in the EZ, while in Romania it represented only 1.8% at the end of 2005 and consumer credit weighted for 5.4% of GDP. At the end of April 2006, the consumer credit to population amounted to RON 19661mln, rising by 7% m/m, while the mortgage loan reached to RON 5,408mln remaining flat through the month. Regarding the preferences of household to different currencies, the RON denominated credits increased by 8.6% m/m, expanding faster than the hard currency credits which rose by only 1.5% m/m. When it comes to long term loans, there can easily be noticed that Romanians prefer the EUR denominated credits to the domestic currency ones, as they bet on further appreciation of the RON vs. the EUR and also on lower active rates in EZ vs. Romania.





Disclaimer: This report does not represent an investment advice and should not be considered as a recommendation. The information in the report is based on sources available to the public and believed to be reliable, and there is no claim that it is accurate or complete.