Non-residents, which are corporate entities for the most part, had leu-denominated Romanian bonds worth RON8 billion in their portfolios, down 28% on the mid-year level, according to the latest data published by the Finance Ministry.
“Foreigners’ investments in Romanian bonds fell in the second half of last year amid the deterioration of the situation in the eurozone and amid a temporary liquidity shortage in the EU, but I think this decline will not last,” said Melania Hancila, chief economist of Volksbank.
The continuation of the arrangement with the IMF and the EU, the improvement of macroeconomic indicators and the prospect of exit from recession had persuaded foreigners to subscribe leu-denominated bonds up to around 20% of the overall portfolio issued by the Finance Ministry. But increasingly strong international tensions have persuaded many to sell, although Romania has constantly received positive evaluations from the IMF and has regained its investment grade rating from rating agency Fitch.
Non-residents’ bond holdings accounted for 11.7% of the market, from 18% at the end of June 2011.
Confirmation of fears that private investors will once again have to play the main part in absorbing the shocks of a public debt crisis, as well as the tighter capital requirements are probably the main reasons for the reduction of non-residents’ holdings of Romanian bonds, according to Vlad Muscalu, ING Bank economist.
Eugen Sinca, BCR analyst, believes the reduction in leu-denominated government bond holdings by foreign investors in the second half of 2011 can be blamed on risk aversion to the region after the intensification of fears over Greece. Under the circumstances, there has also been a slight appreciation of the Romanian currency, with the leu/euro exchange rate reaching RON4.33/euro in December, from RON4.19 to the euro in June.
What will happen in 2012
Hancila expects the downward trend of foreign placements in Romanian government bonds to reverse in 2012, especially since there have been encouraging signals from foreign investors since the beginning of the year, showing an increased interest for Romanian government debt.
She expects yields on government bonds will continue to decline, especially since major central banks injected sufficient liquidity into the market, and Romania has a low level of public debt and a reputation as a good payer. The decline of CDS levels for Romania in the last month, the consolidation of the inflation rate around 3% and the real positive monetary policy rate are additional reasons for the gradual decline in yields paid by the Romanian state.
“I think in 2012 foreign investors will consolidate their presence on the leu-denominated bond market thanks to the attractive yields and to the relatively low risk given the continuation of the arrangement with the IMF and the EU,” believes the BCR analyst.
The decline in the portfolio of leu-denominated government bonds held by foreigners suggest that Romania would be less vulnerable to a shock scenario in which those investors would decide to sell Romanian bonds in bulk.
(English version by Daniela Stoican)