The interest rate paid by the Romanian state at the latest five-year bond auction rose slightly, to 5.2% per year, while Poland borrows at 3.3% per year in zloty. On shorter maturities the Polish state pays less than 3%, while the yield in lei is slightly less than 5% per year.
“The yield difference on short-term securities is influenced by the inflation level, but as far as long-term bonds are concerned the convergence theory says yields should be more or less equal. This difference that exists even for long-term bonds is to a certain degree linked to the monetary policy. The BNR would have room to cut the key interest rate by one percentage point if it let the exchange fluctuate freely,” believes financial analyst Florin Citu.
The Polish central bank cut the monetary policy rate during the crisis to 2.75% per year, while Romanian central bank BNR froze the key interest rate on lei at 5.25% a year in May last year. BNR has signaled though that it plans to resume the cycle of monetary policy relaxation, with analysts expecting a cut to the key interest rate as early as next month.
But analysts’ expectations could be upset by the heightened pressure on the exchange rate in the past few weeks. The Romanian currency leu has lost almost five percent to the euro since the beginning of June after foreigners liquidated their positions on government bonds in lei, which led to higher demand for foreign currency.
“BNR has two objectives – to keep inflation and the exchange rate under control and the recent depreciation of the leu creates problems because the central bank should intervene more on the market to defend the leu,” Citu says.
Annual inflation reached 5.3% at the end of May, but central bank and analysts’ forecasts suggest lower pressure on prices in the second part of the year. But the inflation level also depends on the exchange rate evolution, considering that many prices are expressed in euros. Poland, where annual inflation was 0.5% in May, does not have this problem because the economy is not as euroized as the Romanian one.
Romania and Poland have similar financing needs for 2013, around 12% of the Gross Domestic Product (GDP). At this level, an additional 2% on the yield paid on government bonds mean additional interest rate payments of EUR300-350 million.
The big difference between the interest rates paid by the two countries is also paradoxical in that Romania is not perceived by investors as much riskier than Poland. The cost of insuring Romania against the risk of default is around 190 basis points (1.9 percent), while in Poland the cost is around one percent lower.
Romania fares better in terms of the budget deficit, with 2.1% of this year’s estimated GDP, as opposed to Poland’s 3.4%.
(English version by Daniela Stoican)