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Leonardo Badea (BNR): While the economy is still adapting to the new conditions, prudent conduct must be maintained

Autor: Financial Market
4 min

„The overall context is still dominated by a high level of uncertainty. There are risks with implications at the level of all economic sectors, and this underlines the importance of debates to identify and test solutions to adapt to the current transformations induced by the overlapping crises we are facing.

From many points of view, regardless of the scenarios, the year 2023 will continue to be difficult for the global economy, and Romania’s economy will be in line with the dominant trends manifested in the area.

The future evolution of the war taking place near our borders represents a consistent risk for the dynamics of the local economy, with indirect effects on the financial sector.

Therefore, the trend of inflation remains an important concern for central banks, both in developed economies and in neighboring emerging economies, where the effects of the war are felt more quickly and with greater intensity.

The sudden exit from the long period of low inflation and very low interest rates generated important tensions for the population and economic agents, including in Europe, where the impact of energy market shocks was particularly strong.

In this context, expectations regarding economic growth during this year remain reserved.

In the event of a negative scenario related to a protracted conflict in Ukraine coupled with a possible more severe thermal regime next winter, the level of uncertainty and volatility of financial markets could increase further.

In such a scenario with unfavorable evolution of exogenous factors, and therefore whose dynamics cannot be influenced in the short term by the mix of economic policies, the impact on economic activity for this year and for the next could be significant and could make the difference between the modest but positive economic growth currently estimated for this year and quasi-stagnation or even decline.

Probably, the downward course of inflation, throughout the European area, could be somewhat slowed down in the short term, in the event that the mentioned risks occur.

In this context, we see that central banks maintain a prudent behavior and implicitly still restrictive monetary conditions. So, lending conditions will likely remain significantly tighter and risk premiums higher compared to the period before the current inflationary cycle, even if most of those involved anticipate that its maximum has already been reached towards the end of last year.

The period of cheap money is already over. This represents an important change compared to previous years, which induces difficulties and requires readjustment to the new conditions, for all categories of debitors and for credit institutions.

This readjustment is not without risks. Even if until now they have not manifested or their effects have not been very visible, the complicated period is not over yet.

At the level of the banking system, we can still observe the improvement in the quality of banking assets, the rate of non-performing loans standing at 2.7 percent in January of the current year, which places us in the green zone from the perspective of this criterion in the statistics published by European Banking Authority.

At the same time, the coverage of non-performing loans by provisions register levels significantly higher than the European average.

The prudential and financial position of the Romanian banking sector is currently adequate, this being reflected including by the ratio of total own funds of 21.7 percent, above the European average.

In the context of the continued low level of financial intermediation, the ratio between loans and deposits is only 71 percent, which shows that, as a whole, the Romanian banking system has ample resources to continue to extend credit where the demand is solid and solvent.

However, as we mentioned, the risks are increasing both locally and internationally, and a possible unfavorable scenario of the evolution of external conditions or of the local economy may have implications including on the position of banks and the accessibility of credit to the real sector.

The effort to adapt to the new conditions is a lasting one, and the need for financing on the market is increasing, both from non-financial companies and from national budgets faced with difficult to control fiscal imbalances and the increase in public debt.

However, the markets are in turn under pressure as a result of the uncertainty generated by the exogenous shocks of recent years, the sudden exit from the long period of inflation and low interest rates, the economic slowdown, as well as the overlap with an intensification stage of the regulatory cycle as response to the challenges introduced by endogenous structural transformations, technological advances, and shadow banking dynamics.

Even before the outbreak of the pandemic, episodes of high volatility were prevalent in the financial markets, whether for the quotations of stocks, bonds, or other asset classes. In the case of crypto assets and financial derivatives, there have been numerous episodes of crisis that have led to large-scale losses for investors and bankruptcies.

I believe that as long as we continue to have a high level of uncertainty and important geopolitical and economic risks, the volatility of the financial markets cannot decrease significantly.

This is yet another adverse factor to which the economic and financial environment must adapt and increase its resilience. But adapting to an environment of high volatility is not easy at all.

It involves new costs, both from the perspective of increased risk premiums and the need to maintain ample liquidity reserves that involve opportunity costs that are all the higher as interest rates are kept at an increased level for a longer period of time.

Beyond the current challenges, the year 2023 also brings opportunities for development. With the ongoing digital transformation and the advancement of new technologies, we can expect to see significant changes in the way businesses operate, the way products and services are delivered, and the way consumers interact with the marketplace.

The COVID-19 pandemic has also had a significant impact on the global economy, accelerating certain trends and raising important questions, such as what the post-pandemic economy will look like, how the growing use of artificial intelligence and automation will affect employment and income distribution, what will be the future of international trade and investment.

I believe there is still much untapped potential for win-win collaboration, building on the model of solidarity proven during the pandemic and within the architecture of the Next Generation EU programs to accelerate the implementation of common solutions to the major long-term crises faced by all states, such as the climate crisis, migration, and demographic decline”.