Romania s sustainable development requirements from the viewpoint of regional economic bank s crediting

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1 Available online at ScienceDirect Procedia Economics and Finance 32 ( 2015 ) Emerging Markets Queries in Finance and Business Romania s sustainable development requirements from the viewpoint of regional economic bank s crediting Gheorghe Zaman a, Zizi Goschin a,b * a Institute of National Economy, Calea 13 Septembrie nr.13, , Romania b University of Economic Studies, Pia a Roman nr. 6, , Romania Abstract This paper is trying to highlight some qualitative and quantitative characteristics of the relationship between regional GDP and loans, both in foreign exchange and lei, for Romania. Taking into consideration the vital importance of funding the national economy by crediting, especiy under crisis and after crisis circumstances, we analyzed the influence of regional loans in lei and foreign currency on the size of GDP at county level. The main objective is to establish the relationship or the extent to which the magnitude of regional crediting is connected with the level of economic and social development of. On the other hand we tried to identify several groups of depending on the size of their credit relative to national average. We regressed GDP on loans in foreign exchange and in lei, using up to two years lags. The main result is that, as expected, both loans in foreign exchange and in lei have positive and statisticy significant influence on GDP at county level. We also found that lagged regressors are statisticy insignificant and only the contemporaneous variables influence the GDP. This suggests that loans are not an important investment channel in Romania, since they are mainly used for consumption, debts payment and have only short-term multiplier effects on local economies Authors. The Authors. Published Published by Elsevier by Elsevier B.V. This B.V. is This an open is an access open article access under article the under CC BY-NC-ND the CC BY-NC-ND license license ( ( Selection and peer-review under responsibility of of the Asociatia Emerging Grupul Markets Roman Queries de Cercetari in Finance and Finante Business Corporatiste local organization. Keywords: loans; economic development; regions; Romania * Corresponding author. Tel.: /383. address: zizi.goschin@csie.ase.ro The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license ( Selection and peer-review under responsibility of Asociatia Grupul Roman de Cercetari in Finante Corporatiste doi: /s (15)

2 126 Gheorghe Zaman and Zizi Goschin / Procedia Economics and Finance 32 ( 2015 ) Introduction The banking system of Romania is currently strongly dependent on banks from the Euro Area countries since it is nowadays dominated by subsidiaries or branches of foreign banks: over 81% as in 2012 and the first 5 banks by size holding over 55% of bank assets (Zaman, 2013). On the other hand, the largest part of crediting of households and nonfinancial/non-governmental trading companies in Romania is in Euro and not in lei, which is the official denomination currency of the country. The high level of the credit stock in foreign currency generates a series of vulnerabilities and risks that might be reduced to a certain extent by measures to stimulate new credits under more advantageous conditions for beneficiaries and safer for the banks (Is rescu, 2010; Dinu, 2012; Zaman, 2013). The level of the interest rates on credits has a primordial importance for relaunching economic growth in Romania, because depending on their size, investment crediting can be realized to a larger or lesser extent. Without investments, overcoming the crisis and re-launching economic growth are less probable. Therefore, an acceptable level of the interest rate and other expenditures and banking charges is a key issue for financing the real economy. These general problems of banking system of Romania are to be found at regional level as well. Regional economic bank s crediting is of vital importance for funding the local economies and for promoting regional development, under crisis circumstances and also after crisis. The territorial characteristic and trends of economic bank s crediting, as well as their relationship with regional economic growth, are currently underresearched in Romania. In this context, we try to establish the relationship or the extent to which the magnitude of regional crediting is connected with the level of economic and social development of Romanian. To this aim we built an econometric model and regressed GDP on loans in foreign exchange and in lei, using various lags. The reminder of the paper is organized as follows. Section 2 addresses some aspects regarding the territorial variation of loans in lei and in foreign exchange in Romania, compared to GDP and earnings dispersion. Section 3 introduces the econometric model, variables and data and Section 4 discusses the results from estimating the model. Finy, Section 5 concludes. 2. Territorial variation of loans in lei and in foreign exchange compared to GDP and earnings Territorial inequalities in bank crediting tend to be very large in Romania, especiy when compared to GDP and earnings (Table 1). The inter-county variation of loans in foreign exchange is the highest, followed by loans lei and GDP. The territorial variation in average monthly net earnings is very low. produces a large part of this inequality: when it is excluded from the computations, the coefficients of variation decrease sharply (Table 1). Table 1. Annual coefficients of inter-county variation of loans against GDP and earnings Average monthly net Loans in foreign exchange Loans in lei earnings GDP Source: own computing based on NBR and NIS data.

3 Gheorghe Zaman and Zizi Goschin / Procedia Economics and Finance 32 ( 2015 ) The relative positions of Romanian compared to national average in 2012 (Table 2) reveal the particular importance of in the national crediting system: the loans/cap in foreign exchange are almost eight times higher than national average, while the loans/cap in lei are over four times higher. This dominant position in crediting is consistent with its economic power and high level of development compared to the rest of the country: GDP per capita in was almost three times larger than average in Table 2. Relative positions of Romanian compared to national average in 2012 County j relative to national average for: County ranking* for: County j GDP/cap Average monthly in foreign GDP/cap in foreign in lei net in lei exchange exchange earnings Average monthly net earnings Timi Br ila Constan a Sibiu Gorj Arge Cluj Alba Arad Bihor Prahova Cara -Severin Hunedoara Dolj Ia i Mure Dâmbovi a Giurgiu Harghita S laj Gala i Bistri a-n s ud Vâlcea Tulcea Ialomi a Covasna Satu-Mare Maramure C l ra i Buz u Bac u Bra ov Olt Vrancea Mehedin i Teleorman Suceava Neam Boto ani Vaslui *in decreasing order of original values Source: own processing using data from NIS and NBR, 2014

4 128 Gheorghe Zaman and Zizi Goschin / Procedia Economics and Finance 32 ( 2015 ) Loans per capita in lei and in foreign exchange in the year 2012 are very strongly correlated with GDP/cap in the same year, the coefficients of correlation being and respectively. The study of tendencies and structural characteristics of credits denominated in foreign and domestic currency in terms of how one currency is replacing the other one, their ways of coexistence, competition and complementarity, and why the interest rates differ by the denomination, in lei and in euro is an important issue, raising a series of theoretical and practical problems concerning the financial and monetary policies of Romania. Crediting denominated in euro is vulnerable to depreciation of national currency against euro, which is the predominant foreign currency in Romania. The preference for the credits denominated in euro versus lei, due to lower interest rates, can be easily undermined by the unfavorable evolution of forex, as well as by pressure generated by rapidly increasing Romania s external foreign debt, especiy on short term. Moreover, in the post-accession period, many foreign debt financing sources (such as FDIs, remittances of Romanian emigrants, receipts in foreign currency from state-owned assets privatization, etc.) strongly decreased (Zaman, 2013). Following the prolonged crisis, the relationship between loans in foreign currency and lei might favour the last one, with favourable influence of the interest rate size. At present, the level of interest rate both in lei and euro is very high in comparison to other EU member s countries, hindering economic recovery and relaunch of economic sustainable growth in Romania 3. Model, variables and data We intend to test the hypothesis that loans are a potential source of regional economic growth in Romania by using multi-factorial regression models. The econometric models employed in the analysis ow capturing the influence of both loans in lei and in foreign exchange (the variables of interest) on county GDP (dependent variable). To this aim we are going to estimate the following equation: GDP j = 0 + 1j Loans_lei j + 2j Loans_lei j (-1) + 3j Loans_lei j (-2) + 4j Loans_foreign j + + 5j Loans_foreign j (-1) + 6j Loans_foreign j (-2) + j, (1) where Loans_lei j stands for the total loans in lei in county j, Loans_foreign j represents the total loans in foreign exchange in county j, (-1) is the previous year, (-2) indicates the two years lag, is the parameter that summarizes the influence of each independent variable, j stands for the county and j represents the error term. Since loans can be used as investments, in order to account for the potential lagged impact of households and company loans on county GDP we introduced one and two years time lags for both variables in the model. Drawing on economic theory, we expect the loans variables (both contemporaneous and lagged) to exert a positive effect on GDP given their investment potential that triggers economic growth. Even if the loans are used primarily for consumption, they increase aggregate demand and further stimulate economic growth via bigger production and employment. The model is to be estimated using county level data (NUTS 3) for GDP in year 2013, while for loans in lei and in foreign exchange data cover the period The data on inflation were drawn from National Institute of Statistics (NIS, 2014), data on loans in lei and in foreign exchange (in current million lei) came from National Bank of Romania (NBR, 2014) and GDP from the National Commission for Forecasting estimated by the National Commission for Forecasting (NCF, 2014)

5 Gheorghe Zaman and Zizi Goschin / Procedia Economics and Finance 32 ( 2015 ) (NCF, 2014). All variables have been measured in constant 2013 lei. 4. Results and discussion We regressed GDP on loans in foreign exchange and in lei, using up to two years lags (equation 1). The parameters of the model were estimated in EViews 7, using Ordinary Least Squares (OLS). Table 3 presents the estimated coefficients. Table 3. The estimated coefficients for the model Variable Coefficient Std. Error Prob. Loans_foreign Loans_foreign Loans_foreign Loans_lei Loans_lei Loans_lei C Adjusted R-squared F-statistic Durbin-Watson stat Number of observations 42 The main result is that, as expected, both loans in foreign exchange and in lei have positive and statisticy significant influence on GDP at county level (Table 3). As regards the one and two years lags for the loans variables in the model, the results indicated that lagged variables are statisticy insignificant and only the current (contemporaneous) variables influence the GDP. This suggests that loans are not an important investment factor in Romania, since they are mainly used for consumption, debts payment and have only short-term multiplier effects on local economies. The loans in foreign exchange have a slightly higher impact compared to the loans in lei, which is not surprising considering their larger share in total loans. The equation (1) was estimated using White heteroskedasticity-consistent standard errors & covariance in order to control for heteroskedasticity. Usual statistical tests indicated a good fit for our data (Table 3). In sum, the results bring support to the hypothesis of loans as an economic growth resource for the economies, but only on the short-run. 5. Conclusion The main result of this paper is that both loans in foreign exchange and in lei have positive and statisticy significant influence on GDP at county level only on short-term. We also found that lagged regressors are statisticy insignificant and only the contemporaneous variables influence the GDP. This suggests that loans are not an important medium and investment source in Romania, since they are mainly used for current consumption, debts payment and have (not always and for countries) only short-term multiplier effects on local economies. Last but not least, the regional crediting asymmetry especiy due to, the efficiency and size of loans in free currency and lei remain a problem to further study. In the same context, as a result of the prolonged crisis impact, the deliver age policy of subsidiaries in Romania of parent foreign banks could change, in the more or less perspective, the relationship between loans in foreign currency and lei in favour of the last one, with favourable influence of the interest rate size. At present, the level of interest rate both in lei

6 130 Gheorghe Zaman and Zizi Goschin / Procedia Economics and Finance 32 ( 2015 ) and euro is very high in comparison with other EU member s countries. This discrepancy is a real obstacle to crisis recovery and relaunch of economic sustainable growth in Romania. References and selected bibliography Dinu M., 2012, Analysis for the Degree of Euroization in Romania, The Journal of the Faculty of Economics, Volume 1, Issue 1, pp , University of Oradea; Beck T. et al. 2009, Who Gets the Credit? And Does It Matter? Household vs Firm Lending Across Countries, The B.E. Journal of Macroeconomics, Volume 12, Issue Berrak B., Krause St., 2007 Studying the Effects of Household and Firm Credit; The Composition of Funds Matter, Forthcoming in Economic Inquiry. Caracota C.R., 2012, Sistemul bancar din România, Ed.Universitar Djankov S., Corral McLiesh, Shleifer A. 2007, Private Credit in 129 Countries, Journal of Financial Economics 84, Is rescu M. 2010, Contribu ii teoretice i practice în domeniul politicilor monetare i bancare, Editura Academiei Române Levine, R., 2005, Finance and Growth: Theory and Evidence in Phillippe Aghion and Stephen Durlauf eds. Handbook of Economic Growth, Netherlands Elsevier Science. Neagu F. et al. 2006, Creditul neguvernamental în România, perspective i implica ii, Caiet de Studii nr.15, BNR. Pelinescu E.coord., 2009, Impactul politicilor de creditare asupra economiei române ti, Editura PIM, Ia i. Rioja, Felix and Neven Valev Finance and the Sources of Growth at Various Stages of Economic Development. Economic Inquiry 421: Von Mises L., 2010, Economia în apte lec ii. Gânduri pentru cei de azi i cei de mâine. Ciclul economic i expansiunea creditelor. Consecin ele economice ale banilor ieftini, translation into Romanian by Institutul Ludwig von Lises Romania mises.ro/266/. White W., 2012, Credit Crises and the Short Comings of Traditional Policy Responses, Economics Department Working Papers No.971, ECO/WKP OECD. Zaman Gh., 2013, Aspects and Trends of crediting the Romanian Economy in Lei and Foreign Currency During the Pre- and Post- Accession Periods, Romanian Journal of Economics, Volume 36, Issue 1(45) June. *** , Raport asupra stabilit ii financiare, BNR. *** Buletin lunar BNR 2008-mai *** Intermedierea financiar încotro?, Seminar tiin ific BNR 58 p. Caiet de Studii nr.29, *** National Institute of Statistics (NIS), 2014, TEMPO online database - time series, *** National Bank of Romania (NBR), 2014, Loans and Deposits by County, aspx *** National Commission for Forecasting (NCF), 2014, Projection of main macroeconomic indicators for the period (in Romanian), May 2014,