Money Buzz! Europa

Tag: Leonardo Badea

  • Agri-food sector is a key element of Romania’s economic development

    Agri-food sector is a key element of Romania’s economic development

    Deputy Governor of the National Bank of Romania (BNR), Leonardo Badea, says that in Romania, the cultivation of the land and the processing of agricultural products has always been of significant economic and social importance.

    With the return to the competitive market economy model in the 1990s, because of the insufficient level of local private capital and public policy support, the competitiveness of the agri-food sector remained weak in relation to that of the external supply. On the other hand, domestic consumption has increased significantly, most of the time being the most important part of the local growth model and often stimulated by fiscal policies.

    Cumulated for 2019, the trade deficit from trade in goods was about 82.1 billion lei, of which the trade deficit with products from the first four groups of goods according to the combined nomenclature was about 5.9 billion lei (I. Live animals and animal products, II. Vegetable products, III. Animal or vegetable fats and oils, IV. Food, beverages and tobacco). For the first 11 months of 2020, the trade deficit with products from the same first four representative groups within the combined nomenclature rose to almost 9 billion lei, ie over 11.3% of the total deficit of trade in goods for the period (79.5 billion of lei). Therefore, in the context of the crisis caused by the COVID-19 pandemic, this vulnerability has intensified and its negative effects are expected to continue to increase during 2021 in the context of the significant loss of agricultural production caused by the drought that subsequently lead to significant financial difficulties for farmers, which adds to those generated by the pandemic.

    Obviously, the contribution of the agri-food sector to the well-being of society is not limited to maintaining balance in foreign trade activity, although this is an especially important one. From agriculture and the food industry, society wants more jobs, economic growth, better environmental protection, but also healthy and nutritional food and a territorial balance that leaves no regions behind.

    We need to create more jobs and grow economically, but some of the challenges are that agriculture is losing jobs and is facing cyclical developments that are closely linked to long-term changes in the temperature regime and that of rainfall. It is also still significantly exposed to the risks posed by climate change, which is still exceedingly difficult to manage through traditional instruments (insurance, financial transactions).

    However, this is not an irreversible fate. It is possible to bring the agri-food sector back on a path to improving competitiveness and to having a more stable and sustainable contribution to economic growth, including for improving the external balance. To get there we need an adequate mix of policies, to which there are already proposals that I will refer to later.

    Economic growth and the number of jobs previously involved an effort for increased productivity and increased competitiveness. Growing production with lower costs does not necessarily have to lead to job cuts (for example as an effect of investing in advanced technologies and equipment), as growth across the sector can create more jobs than redundant ones.

    We must have on our agenda as a priority a sustainable development that aims to protect the environment. We need less water pollution from nutrients and pesticides, to stop soil degradation, to have fewer negative effects of pesticides on biodiversity and to better respond to internal and external demand that in recent years is increasingly focused on organic products. This effort is also supported by European policy, which has created facilities for the development of organic farming that we may be able to make better use of in the future than we have been able to do so far.

    At the same time, we need a territorial balance, because modern society no longer accepts that the more fragile regions (from the perspective of resources) and less developed are left in economic decline and demographic abandonment. But the key to this is investment: from education and training of the (future) appropriately qualified workforce to equipment and infrastructure.

    Of course, under normal conditions, the profitability of companies in the field of agriculture is not among the highest, compared to other sectors of activity, as shown by publicly available data on the website of the Ministry of Finance. An average return on assets calculated based on this data places agricultural companies at a level of about 5.38% in 2019 (before the crisis), almost half compared to the construction sector but still more than double that of utilities. It shows that, given the important prospects of this sector, there is certainly a sustainable basis for increasing the efficiency and profitability of agricultural investment activities.

    One of the main causes of the variability of the performance of agricultural firms is given by the volatility of agricultural product prices which has amplified because of greater openness and integration with international markets. Climate change has also led to a higher frequency of extreme events, which have an impact on production and markets and contribute to increased volatility. However, in Romania the average return on assets of companies in this sector has not fluctuated so much during the last five years, but varied between a minimum of 3.66% in 2015 (a weak year in terms of profitability for all sectors of activity) and a maximum of 7.34% in 2017 (MFP data, NBR calculations).

    In the context of the above, lending by banks and NFIs for the agri-food sector has increased during the last 6 years but not at a very fast pace. The cumulative value of the exposures of the two categories of financiers towards companies in this sector increased by approximately 31% from about 17.5 billion lei in December 2015 to over 23 billion lei in December 2020, and during the pandemic period it increased by about 6.8% (December compared to March 2020). From the statistics the largest share is the financing granted to companies in the field of cultivation of non-permanent plants (36% of the total in December 2020, mainly for cereal crops), on the second place being those in the field of animal husbandry (13% of the total in December 2020). Exposures of banks to companies in the field of canning, food or beverage manufacturing with a higher degree of processing are lower, together accumulating about 41% of the total in December 2020.

    There is a very high heterogeneity in the financial health of agri-food firms that is holding back the development of lending to this sector and points out that the proposed measures for these sectors should be targeted, all the more so as constraints on budgetary resource allocations increase. In addition, size matters a lot in this area. Most companies with agri-food activity are micro-enterprises and over the years have failed to move into a larger size group.

    Agriculture was in the attention of the National Committee for Macroprudential Oversight (CNSM) last year. The Committee considered that food imports significantly higher than exports had created a vulnerability, with possible systemic potential, for at least two reasons: (i) the experience of other countries shows a close relationship between the deterioration of the current account deficit and the onset of a financial crisis. or balance of payments; and (ii) in the light of the lessons of the crisis generated by the current health crisis, ensuring food security becomes a priority.

    The first recommendation is to increase the emphasis on developing a green, more environmentally friendly economy. The European Union allocates important funds to this objective, and the agri-food field in Romania can relatively easily qualify to the requirements. European statistics have identified Romania’s agriculture among the leading sectors in CO2 or other greenhouse gas emissions. CNSM’s recommendation was that the Government, through the Ministry of Agriculture and Rural Development (MADR), develop and budget with priority programs in the amount of at least 9.4 billion euros to implement the EU strategy to reduce climate risk (“From Farm to Farm Fork “), in line with the specific objectives of climate change in the future Common Agricultural Policy. It is recommended that these programs be developed in such a way as to facilitate green funding. In fact, many countries in the region (Poland, Hungary, Slovenia, etc.) have already issued such green bonds, many issues being made by governments themselves.

    The extensive technologizing of the agri-food sector is another CNSM recommendation. The topic is also at the top of the European agenda and significant funds will be allocated in the coming years for implementation. Romania could benefit considerably from this alignment with European priorities, for at least two reasons. First, Romania is at a disadvantage at European level in the field of innovation (including in agriculture), so any progress is welcome. For example, only 1 percent of companies operating in the agri-food sector use industrial robots (at the other extreme are the Netherlands with 22 percent and Sweden with 31 percent). Secondly, Romania has many strengths to move to the widespread use of digital technologies in agriculture and food industry: telecommunications infrastructure, implicitly good internet access, many IT specialists, generally favorable attitude of companies and the population in assimilation of digital technologies. In fact, digital technologies could compensate for part of the disadvantage of the pronounced fragmentation of agricultural land in Romania (by far, the highest in the EU). CNSM’s recommendation is that the Government, through MADR, develop and budget with priority programs in the amount of at least 0.5 billion euros that use the potential offered by digital technologies.

    Obviously, there is no single answer to the challenges of competitiveness and development in the agri-food sector, the solution of which would lead to positive chain effects both from the perspective of macrostability and economic development in general and the well-being of the population. That is why the CNSM initiative unanimously embraced by the most important categories of actors with relevance in this field proposes a balanced set of measures. They replace a rather fragmented approach at present (because other measures and programs existed before the CNSM’s proposed framework). There is therefore a need for a truly strategic and as uniform an approach as possible to prevent waste of resources and concentration of efforts, which in my opinion is one of the merits of the CNSM package of recommendations.

    Secondly, coherence is essential. Therefore, it is particularly important to find ways to improve governance in order to mobilize the necessary tools at the local level, to develop truly economically viable projects and to support the growth effort at the level of all regions.

    All these things force us to follow not only the presentation of the problems induced by the need to develop the agri-food sector but also the efficient way in which the solutions (many of them being already discussed and known in the public space) are put into practice. A country’s ability to make progress is clearly linked to how it can implement sectoral public policies with rapid results and achieve rapid development. Not at all simple, this is our challenge in a dynamic world, where flexibility and innovation are necessary but not sufficient premises for success”.

  • The evolution of the Romanian economy and the public policies mix

    The evolution of the Romanian economy and the public policies mix

    Deputy Governor of the National Bank of Romania (BNR), Mr. Leonardo Badea, talked to Money Buzz! Europa about the evolution of the Romanian economy.

    ”For more than a year most discussions regarding the evolution of macro-financial variables and forecasts have involved references to the evolution of the COVID-19 pandemic.

    The pandemic shock that has hit almost the entire globe is the most obvious and harsh demonstration that the health of the population and the risks of disease it faces, together with the overall development of the medical system have major repercussions on the evolution of the economy.

    Implications of the medical crisis

    If until 1 year ago we only talked about the long-term implications of these factors, more from a demographic perspective, in recent months we have become accustomed to using short-term models and high-frequency data to correlate the medical situation with the degree of restrictions of activities and mobility of people and finally with the expected evolution of the sectors of the economy.

    After sharp decreases starting with the second half of November, the number of new cases of SARS-CoV-2 infection in Romania registers a quasi-stagnation during the first part of February, a trend visible in the number of patients admitted to ATI and the rate of testing positivity. At the same time, since the beginning of this year, the pandemic evolution in Romania was somewhat attenuated compared to the region.

    Given these conditions, we could have anticipated that in Romania there were favorable premises for a continuation of the economic recovery trend that manifested during the third and fourth quarters of last year.

    Unfortunately, the evolution of this pandemic is extremely volatile, and the situation can change significantly in only one week, thus any estimation regarding the evolution of the economy during the following quarters remains very imprecise.

    For now, vaccination of the population is the only viable solution to overcome the medical crisis and implicitly the economic one, until the development of an accessible treatment, possible to be administered without hospitalization, aiming to reduce almost to zero the risk that an infected person will develop severe forms and also to decrease the period of convalescence.

    Until we will reach a reasonable level of collective immunity, we can assume that the current measures of distancing and the restrictions of several activities will be largely maintained in Romania throughout Q1 2021 (also in the context of a possible third wave of infections), mainly affecting the sectors in which the activity involves a significant degree of human interaction (for example HoReCa, transport, entertainment, cultural and recreational activities). Hopefully, as the vaccination effort progresses, we can expect that our abilities to forecast the evolution of the macroeconomic variables will improve gradually.

    Short-term economic prospects

    In Romania, the highest degree of volatility of economic indicators generated by the evolution of the pandemic was recorded during the 2nd and 3rd quarters of last year.

    We then had an unprecedented economic downturn in quarterly data, followed in the next quarter by a broad but incomplete recovery. During the fourth quarter, however, the return trend continued at a slower quarterly pace.

    After the 3.9% contraction recorded for the whole of 2020, we can expect the economy to grow at a rate close to potential during the next two years, if the pandemic situation will not turn to worse than it is now.

    Otherwise, we could see a start-stop-and-restart pattern of activity in several important economic sectors and indirectly a lower level of consumption which will most probably lead to a still positive but possibly much lower growth this year.

    We must keep in mind that economic activity was negatively affected in 2020 by weak agricultural production, with an estimated impact of about -1 percentage point on the average annual GDP dynamics, but it is possible that the current year will be at least neutral in the perspective of agriculture’s contribution to growth.

    A prudent estimate leads us to the conclusion that the maximum level of real GDP registered before the crisis period (which was recorded at the end of the first quarter of 2020) may be reached and exceeded until the end of this year.

    A series of high-frequency data shows that the positive surprise brought by the economic growth recorded during the last quarter of the previous year, compared to expectations, was due to developments in some sectors that have shown increased resilience to the pandemic situation, such as industry and trade. However, although the upward trend continued, the pace was slower for them as well.

    During the fourth quarter of 2020 the construction sector, which recorded significant growth during the third quarter, was inevitably affected by the specific seasonality caused by weather conditions. In the case of services, the fourth quarter also showed a decrease of activity compared to the previous quarter.

    For the first quarter of 2021 we can anticipate a slowdown in real GDP and its components, justified by a deterioration in the outlook for external trading partners, but we expect to see positive quarterly developments on seasonally adjusted data.

    In the absence of widespread adverse shocks  and a significant new wave of infections (for example a third wave comparable in severity with the second one), economic operators are likely to continue to adapt gradually to the new conditions, and sectors such as industry or trade will continue to play the role of locomotive for economic growth, supported by demand (in particular by domestic consumption) and to a more limited extent by gross fixed capital formation, but possibly also by external demand in the event of a gradual recovery of our external trading partners.

    Starting with the second quarter of 2021, against the background of the advance of the vaccination campaign, we can anticipate a continuation of the gradual relaxation of the restrictions imposed by the authorities. This is likely to boost economic activity in several other sectors, such as HoReCa. Activity in these sectors should normally also benefit from more favorable weather conditions, with the end of the cold season, which will facilitate outdoor activities, with the presumed reduction of contamination risks. Under these auspices, the economic recovery could become more widespread and robust in the summer.

    The policy mix

    The mix of public policies is always extremely important, especially during crises. In normal times this mix is decisive to preserve a balanced advance of the economy, without the risk of overheating, and to build adequate buffers that create or increase policy space, much needed to counteract unexpected adverse shocks.

    It also has an important role in steering the economy and the society towards innovation, increasing productivity, modernization and ESG (environmental, social and governance) goals. But probably the most visible effects (over short or medium term) of an adequate policy mix are felt during crises.

    It is especially under such exceptionally circumstances that public authorities need to cooperate and to synchronize their actions aiming to reduce both the intensity and the length of the adverse effects on the people and the economy.

    As we know, in Romania the central bank not only has the role of monetary authority but is at the same time regulatory and competent authority for micro-prudential supervision of credit institutions, while also having responsibilities for the operation of payment systems and financial stability, the latter role being exercised under an inter-institutional collaborative framework by participating to the activities of the National Committee for Macroprudential Oversight.

    From the perspective of all these responsibilities, the National Bank of Romania (NBR), which last year celebrated 140 years of existence in the service of the Romanian economy, acted with all available and necessary tools to contribute to mitigating the economic effects of the pandemic crisis.

    The central bank’s actions have been gradual and carefully calibrated to address the complex challenges posed by an unprecedented crisis, about which it was expected from the beginning that it will not only have transitory effects but would involve profound structural changes and manifestations that could spill over a considerable period.

    At the same time, it was quickly obvious to everyone that we were facing a crisis whose immediate consequences can be addressed more effectively through measures with rapid impact which are specific to fiscal policy. Monetary policy instruments can contribute to the mix of policies in response to such a crisis but have a lower impact and their effects are felt only gradually given their specific transmission horizon (lag). Monetary policy has such long outside lags because it primarily affects business investment plans. Thus, a change in interest rates may not have its full effect on investment spending for a considerable time. However, the particularities of this crisis make also relevant the impact on households and especially on their capacity to service debt given the sudden (hopefully temporary) shock on current income. It was an important issue that both the fiscal and monetary policies needed to address together, and this happened almost everywhere.

    At the same time, we cannot forget the important differences between our economy and other economies in the region with which we often compare ourselves, and especially the important vulnerabilities and major structural deficiencies with which we have entered this crisis.

    If the NBR had not taken them into account in the careful and prudent calibration of the conduct of monetary policy, there would have been a risk of turbulence whose magnitude, even if essentially unjustified by fundamental factors, had already begun to be visible in the local financial markets in the context of the sharp rise in risk aversion on the international markets.

    However, nowhere in the world could this particular crisis have been addressed only by monetary policy instruments, and the idea that monetary policy has an answer to all problems is obviously deeply wrong. At the same time, I also think that it is wrong to consider that such a complex crisis should be fought only by fiscal policies. As long as the monetary policy has the necessary space in relation with its main objective of price stability, it is natural that in should contribute to the effort aimed of helping the people and the economy overcome the negative effects of the pandemic.

    That is why there is no doubt that the inter-institutional collaboration and the synchronization of crisis response policies and measures, both at national and European level, have played an important role in effectively reducing the negative economic effects as much as possible until now. Especially from our country perspective where the space available for activating crisis response fiscal policies has been and is less extensive compared to other EU or euro area member countries, European solidarity has been an extremely valuable aid.

    After one year of crisis, we are still in a situation where our visions continue to be plagued by uncertainty. Beyond our optimistic or pessimistic attitude, we must remain cautious in our approaches but also proactive, because the pandemic war has not yet been won”.

  • Leonardo Badea (BNR): Financing through the local capital market is one of Romania’s opportunities

    Leonardo Badea (BNR): Financing through the local capital market is one of Romania’s opportunities

    ”The effective promotion of the Romanian capital market to the status of emerging secondary market by FTSE Russel financial evaluation agency is the result of the worthy efforts in recent years of the entire local community involved in its development.

    The effects are both direct (the inclusion of local companies in a series of international indices pursued by a class of larger investors compared to those present on our market so far), but especially indirect, mainly reputational and with long-term structural implications.

    Especially in the current context where all economies are in fierce competition for funding, effective entry into a higher category of capital markets is equivalent with an additional anchor in supporting the process of financial integration and European convergence, as well as with improved access to foreign capital. Acquiring the status of an emerging secondary capital market increases the attractiveness for foreign investors of locally issued financial instruments, from which will benefit both the private segment of the economy and public sector bond issuers. At the same time, it could facilitate the funding of the public-private partnerships.

    The more the Romanian economy will be open to financing through the capital market, the more significant the benefits of the new status acquired by it will be and the more visible the positive transformations will be. The step that the Romanian capital market is taking now has the premises to facilitate the effort of economic recovery and modernization of the country, if more and more entrepreneurs and local administrations will have the courage and ingenuity to turn their development ideas into projects that are economically feasible, transparent, with strong governance and through which to provide an attractive partnership for capital market investors.

    In my opinion, financing through the local capital market, which today has become an emerging secondary market, is one of the great opportunities for Romania’s development in the near and medium future, along with financing through European funds”.