Mugur Isarescu, the governor of the National Bank of Romania (NBR), is uncompromising on the issue of foreign-currency lending. “I have to control this otherwise we will have serious problems,” he insists.
From a central banker’s perspective, there is certainly reason to fret. According to the latest figures from the NBR, private-sector credit growth in Romania has soared, from 9.3% of gross domestic product (GDP) in 2000 to more than 21% of GDP last year. Although this is still extremely low, even by regional standards, it is the structure and the pace of the lending that causes Mr Isarescu concern. In 2000, the vast majority of the lending was to companies, which are usually hedged against foreign-exchange risks. In 2005, however, just over one-third of the credit – more than half of it in foreign currency – was to households, which are exposed to currency devaluation.
FX lending balloons
Foreign currency-denominated lending in Romania has ballooned, rising from just over 3bn lei ($1bn) in January 2000 to 14bn lei in January 2006. According to a new IMF report on credit growth in eastern European countries, foreign currency loans in Romania grew by more than 60% last year, compared with an 11% increase for leu-denominated credits. While 40% of the sector’s deposits in 2005 was in foreign currency, 60% of loans was in euros or dollars. “When you have such a mismatch, you have a problem,” says Mr Isarescu.
According to a report on Romania’s banks by ratings agency Fitch: “Worryingly, for mortgages – which are longer-term, allowing greater potential changes in exchange rates – the level [of foreign currency lending] is much higher at over 90%, mainly due to the high risk premium for longer-term domestic currency borrowing.”
Steven van Groningen, chief executive of Raiffeisen Bank in Bucharest, says: “There’s simply no yield curve for leu-denominated [mortgage] loans. There is no long-term local funding available, [which is why] banks are over-liquid in foreign currency and don’t quite know what to do with it.”
Interest rate differentials
The surge in foreign-currency lending is part of a regional trend, with the spreads between eurozone and central and eastern European interest rates continuing to make foreign currency-denominated loans more attractive for both borrowers and lenders. Interest rates in Romania are at 8.5%, compared with 2.5% in the eurozone.
Even in some of the central European countries, which are now part of the EU and whose interest rates are lower than their eastern neighbours (4% in Poland, 6% in Hungary), foreign currency lending is soaring because of the interest rate differentials with the eurozone. Poland leads the region in foreign currency-denominated mortgage lending, with roughly three-quarters of the stock of housing loans in foreign currency at the end of last year.
Although foreign currency mortgage lending is less advanced in Hungary, it is catching on rapidly because of higher interest rates and cuts to the state subsidy scheme for forint-denominated mortgage loans. Although the bulk of the stock of mortgage loans is in forints, nearly all the new lending last year was in euros or Swiss francs.
In other central and eastern European countries where bank lending is growing rapidly, there is strong demand for foreign currency credits. In Bulgaria, foreign currency lending grew by 57% in 2004, significantly outpacing local currency borrowing; while in Ukraine, foreign currency lending increased by 18.7% in 2004, slightly higher than the growth in local currency credits, according to recent data from the IMF.
Controversial curbs
Romania’s central bank has joined its Croatian and Bulgarian counterparts in trying to stem the rise of foreign currency lending through a variety of prudential and administrative measures. Concerned about the country’s soaring current account deficit, which is being fuelled by a consumption boom, the NBR issued new regulations last September that restrict the amount of foreign currency lending to three times the level of a bank’s equity. It has also raised the minimum reserve requirement on foreign-currency denominated liabilities to 40%.
Hungary’s central bank is mulling over restrictions on foreign currency lending and the National Bank of Poland has proposed new regulations that would significantly tighten the eligibility criteria for new foreign currency-denominated mortgage loans.
However, the curbs already in place in Romania, Croatia and Bulgaria have riled bankers and, so far, have had a limited effect in reducing the demand for foreign currency loans and addressing macroeconomic imbalances. In Romania, euro-denominated loans soared by 49.5% this February, marginally lower than the growth in February 2005, according to the NBR. Although Mr Isarescu insists that it is still too early to judge the effectiveness of the curbs, bankers and analysts believe the measures are heavy-handed and counterproductive.
Distortionary effects
The IMF says: “The demand for credit in Romania remains strong, so borrowers and lenders will have a continued incentive to find alternate channels for funding. Restrictions may have favoured the less regulated non-bank financial sector.” The IMF has urged the NBR to bring non-regulated lenders, such as leasing companies and consumer finance specialists, “within the scope of its authority”. It says that “administrative measures [should be] viewed as a last resort, owing to their bluntness and distortionary effects”.
Fitch says: “The effect(s) of these regulations remain to be seen. Foreign-owned banks [could] simply request their parents to finance loans, [though] this would be very much against the spirit of the regulations. The aim [should be] to slow down FX lending, not necessarily force early repayment upon borrowers.”
Dan Pascariu, chief executive of HVB Bank Romania, says Romania’s banking industry tried to convince the central bank to allow lenders to regulate themselves, but was unsuccessful. “By imposing restrictions, the central bank forces us to find ways to circumvent them. I understand the NBR’s predicament but we can’t enter the EU with these kind of restrictions.”
Mr Isarescu says self-regulation would provide no guarantees that foreign currency lending would slow, and insists the measures are temporary.