Price Convergence* 1..9.8.7.6.5.4.3.2.1. Eurozone 1 st wave ACs 2 nd wave ACs.5.51.51.44.45.45.31.18.18.13 Czech Rep. Estonia Hungary.66.55.54.39.41.38.33.36.25.21 Latvia Lithuania Poland Slovakia Slovenia Romania Bulgaria 1993 22 *Ratio between GDP per capita using the exchange rate and GDP per capita in PPP/PPS Source: European Commission, World Bank, national central banks and statistics offices
Romania: Financing Current Account Balance 4 2 percent of GDP direct investment portfolio investment other capital investment -2-1.4-4 -6-8 -1-8. -4.5-5. 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23* Source: National Bank of Romania -7.3-6. -6.9-4. -3.7-5.5-3.3-6.5 *) estimate
15 1 5 percent of GDP Financing Current Account Balance in Poland, Slovakia and Hungary direct investment portfolio investment other capital investment -5-1 -15-2 Poland Slovakia Hungary 1996 1997 1998 1999 2 21 22 1996 1997 1998 1999 2 21 22 1996 1997 1998 1999 2 21 22 Source: central banks and national statistics offices
Central bank reaction function, 1993-8 Reaction function, 1993:2-1998:6 Dep. Var. is LRMBASE (change in logs of money base) Variable Coefficient Std. er. Stat. t Prob. C.7723.16433 4.699628. LCPITP.187471.26377.98389.3674 LCPITN -.131326.186643 -.73623.4845 LYTP.144543.241883.597574.5525 LYTN.13714.18942.6975.4929 LXRP -.413172.115975-3.562594.7 LXRN.31164.11499 2.86934.68 Adjusted R 2.26987 Durbin-Watson 2.16785 Prob(F).381
Central Bank Reaction Function: Inflation Targeting Light Dependent Variable: LRBASE Method: Two-Stage Least Squares Sample(adjusted): 1997:8 22:8 Instrument list: LRBASE(-1) LCPITP (-1) LCPITN(-1) LYTP(-1) LYTN(-1) XR(-1) NX(-2) Variable CoefficientStd. Error t-statistic Prob. C -.925278.38318-24.1476. LCPITP -2.29392.25386-8.18597. LCPITN 1.985937.74551 2.663898.11 LYTP -.215399 1.314761 -.163832.875 LYTN 3.24746.695849 4.666826. R 2.64855 Adjusted R 2.623398 F-statistic 34.38366 DW 1.719325
5 45 4 35 3 25 2 15 1 5 Spread of Eurobonds SLOVAKIA HUNGARY POLAND BULGARIA ROMANIA Moody s S&P A3 BBB A1 A2 Ba2 Ba3 A- BBB+ BB+ BB 31.Aug. 31.Jan.1 29.Jun.1 3.Nov.1 3.Apr.2 29.Sep.2 7.Feb.3 14.Mar.3 18.Apr.3 23.May.3 27.Jun.3 1.Aug.3 5.Sep.3 1.Oct.3 23.Oct.3 3.Oct.3 6.Nov.3 13.Nov.3 2.Nov.3 27.Nov.3 4.Dec.3 11.Dec.3 Source: Bloomberg Romania (212) Bulgaria (213) Poland (213) Hungary (213) Slovakia (21) Spread vs. Bunds (bps)
15 1 5-5 -1-15 -2-25 Spread of Eurobonds (difference versus the spread at issuance) SLOVAKIA HUNGARY POLAND BULGARIA ROMANIA Moody s S&P A3 BBB A1 BBB+ A- A2 Ba2 BB+ Ba3 BB 29.Sep. 28.Feb.1 31.Jul.1 31.Dec.1 31.May.2 31.Oct.2 14.Feb.3 21.Mar.3 25.Apr.3 3.May.3 4.Jul.3 8.Aug.3 12.Sep.3 17.Oct.3 24.Oct.3 31.Oct.3 7.Nov.3 14.Nov.3 21.Nov.3 28.Nov.3 5.Dec.3 Source: Bloomberg Romania (212) Bulgaria (213) Poland (213) Hungary (213) Slovakia (21) Spread vs. Bunds (bps)
Estimated Size of Balassa-Samuelson Effect for the 199's versus Germany Actual annual real appreciation (annual average;%) Estimated size of BS effect simple econometric accounting evidence Czech Rep. 4.9 1.6.1 Hungary 2.4 1.9 1. - 2. Poland 5.8 n.a. 1.2-1.5 Slovakia 4.3 1. - 2. n.a. Slovenia 2.2.7-1.4 1. - 2. for 1997-23 H1 versus Eurozone Romania 5. n.a. 2.5 3.4 Source: Mihaly Andras Kovacs, NBH Working Paper 22/5, p.3; NBR estimates
6 5 percentage points Inflation Rate percentage change against the same period of previous year free prices not including prices for seasonal products (weight in total growth) seasonal products prices (weight in total growth) administered prices (weight in total growth) annual inflation rate (right-side scale) 6 5 4 4 3 3 2 2 1 1 Jan. Apr. Jul. Oct. Jan.1 Apr.1 Jul.1 Oct.1 Jan.2 Apr.2 Jul.2 Oct.2 Jan.3 Apr.3 Jul.3 Oct.3 Source: National Institute of Statistics, NBR calculations
Relative Prices 4 percent; annual average 35 3 25 2 15 1 5 tradables non-tradables 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 9M 23 Tradables: Industrial producer price index Non-tradables: Consumer price index for services Source: NSI
Nominal appreciation (+)/depreciation (-) against EUR 3 percent; change in 22 compared to 1999 2 1-1 -2-3 -4-5 -6 Czech Rep. Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Source: own calculations based on national central banks' data
Cumulative FDI inflows per capita, 1989-22 4, USD 3,5 3, 2,5 2, 1,5 1, 5 Czech Rep. Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Source: EBRD
4 35 3 25 2 percent Domestic Credit as Percentage of GDP credit to households credit to private companies credit to public companies domestic credit (credit to non-government and credit to government, net) 15 1 5 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 Oct.3 Source: National Bank of Romania
Correlation of GDP and Inflation with the Eurozone.5 Slovenia.4 Estonia Latvia.3 Lithuania Inflation.2.1 Czech Rep. Slovakia Poland Bulgaria Hungary. Romania -.1 -.4 -.2..2.4.6.8 1. GDP growth Source: Oesterreichische Nationalbank, Focus on Transition 2/21; NBR calculations
Correlation of shocks with the Eurozone.4.3 Poland Hungary Demand shock.2.1. -.1 -.2 -.3 Bulgaria Czech Rep. Slovakia Slovenia Estonia Romania -.4 Lithuania Latvia -.5 -.6 -.2 -.1..1.2.3.4.5 Supply shock Source: Oesterreichische Nationalbank, Focus on Transition 2/21; NBR calculations
Conclusions (I) Romania had poorer starting point vs. ACs from nominal perspective; despite progress, price convergence still relatively low, need for catching-up increasing External balance a constraint until 1999-2 (large variations, limited autonomous financing); importance of stronger productivity-enhancing FDI flows, especially in export sectors Changing reaction function of CB a testimony to primordiality of price stability (up to 1998 exchange rate concerns render inflation, output reactions insignificant; post-1998, flexible inflation-targeting light concerns prevail) Since move to inflation targeting and nominal convergence itself constrain use of exchange rate, fiscal & wage policies (and even more so, structural adjustment addressing quasifiscal losses in the state sector) must gain a more substantial role within the macro policy mix
Conclusions (II) Policy of encouraging moderate, sustainable real appreciation vs. an implicit basket (currently 6% EUR/4% USD) was succesful in marrying disinflation and maintaining competitiveness; currently need for tighter link to the EUR; moving to greater flexibility within the managed float context Need for cautiousness when discussing exchange rate: Romania still weakly correlated w. EU overall, potential for asymmetric shocks high Since rapid spread contraction with continued liberalization of capital flows will mean less interest rate autonomy going forward, fewer degrees of freedom exist for exchange rate adjustment even before ERM2 entry Summary: - need to front-load real sector reform; - sustainability of rapid financial sector development contingent on adjustment of external position; - timing of ERM2 entry based on minimizing time spent in training room, in turn dependent on accumulation of critical mass of adjustment, where a limited window of opportunity exists