The COVID-19 pandemic took a heavy toll on all sectors of economic activity and triggered a significant rise in uncertainty and a fast adjustment of risk premiums on financial markets, with the containment measures leading to bottlenecks in supply chains and a sharp contraction in demand, whereas financial markets faced marked increases in volatility and notable asset price adjustments, the central bank said in its report.
On the other hand, the central bank noted the pandemic crisis may also be an opportunity for implementing structural measures to place Romania into a novel paradigm of more sustainable, innovative and resilient economic growth.
It said a third factor with an impact on financial stability that stands at a high level I the risk of an uncertain and unpredictable legislative framework in the financial and banking sector.
Two other risks are moderate and refer to the default risk for loans to the private sector and the access to finance of the real economy.
The central bank sees all five systemic risks mentioned rising in the period ahead.
The risks to financial stability, already amplified by the impact of the COVID-19 pandemic, can also be heightened by the interactions with the structural vulnerabilities of the Romanian economy, a significant one being the loose financial discipline of companies in Romania, characterized, on the one hand, by a relatively high value of overdue payments in the economy and, on the other hand, by a notable share of companies with equity below the minimum requirements set by law.
Even before the pandemic, a quarter of non-financial corporations viewed payment discipline as a pressing problem for their activity. The arrears to non-bank trading partners reported by the most important companies in Romania totaled RON55.7 billion in June 2019, whereas overdue payments of the sector as a whole amounted to RON85.5 billion at end-2018 (9% of GDP).
Prior to the current crisis, companies with major capital shortfalls held a significant share based on the data for the entire sector – 38% in 2018 – and favorable macroeconomic developments over the last years made only a marginal contribution to narrowing this share.
The central bank added it is possible to see an increase in the number of business closures, many of which via insolvency proceedings. For now, recent developments do not indicate such an evolution. The total number of companies undergoing insolvency proceedings at end-April 2020 was of 35,300, down 6% from the year-ago period, while the number of firms that entered insolvency proceedings in the first four months of the year fell by 34% from the first four months of 2019.
Continued efforts towards improving the legislative framework on payment discipline in the economy should become a priority, alongside the computerization of the national tax administration agency ANAF, the central bank said.
Another important vulnerability is the low financial intermediation, where Romania ranks last in Europe.
Loans to the private sector as a share of GDP came in at 25% in March 2020 (down 0.7 percentage points from March 2019). Comparatively, this indicator posted significantly higher values in the region (34.7% in Hungary, 51.9% in Poland, 53.3% in Bulgaria, 53.4% in Czech Republic).
Low financial intermediation shows, on the one hand, the reduced access to bank financing, with the financial sector having a small contribution to economic growth, yet on the other hand, this deters a deepening of the current crisis following the pass-through of shocks from the real economy to the banking sector, the central bank noted.
The analysis of indebtedness shows however a worrying development for non-financial corporations: a higher reliance on foreign financing. In March 2020, non-financial corporations’ external debt amounted to RON195 billion (of which approximately 80% came from non-resident firms belonging to the same group as companies in Romania).
This type of financing implies a series of additional risks to financial stability in Romania that become more relevant in the context of the COVID-19 pandemic, the central bank noted. First comes the risk of non-rollover of short-term loans amid a possible flight to home, with non-resident creditors preferring to finance firms in the country of origin or firms with which they have a closer relationship to the detriment of firms in other countries, in spite of the latter’s better financial standing. The second risk relates to the sovereign risk that partly materialized at the onset of the current crisis via changes in the outlook for the country’s rating to negative, with the volume of external debt counting among the criteria used for these assessments in the case of Romania. The third risk refers to the gap between credit demand and supply, as firms with better financial results and economic governance had easier access to foreign financing, the central bank said.
Vulnerabilities arising from the population structure have worsened further since the previous financial stability report, with the main negative contribution coming from the negative natural population change. The share of elderly persons increased further, reaching 17% of total population, while the share of persons aged below 14 is of 14.6%.
The change in the age pyramid will boost expenditures related to aging population, while the decrease in active population will put pressure on the financing capacity of such expenditures, affecting the labor market as well. In this context, the improvement in the education system is necessary to ensure an adequate training of workforce and to support the convergence process, the central bank noted.