BR Analysis. Loans become more expensive this year in Romania eroding purchasing power, profits

Romanian business environment and households are hit by surging borrowing costs as interest rates rose quickly during the first three months of this year, despite government’s measures aiming to cap borrowing costs, eroding the profits of companies and the purchasing power of indebted persons.

Fresh central bank data suggest that government’s measures like “greed tax” had no effect on real interest rates.

In the case of households, the average interest rate for new mortgage loans in local currency rose from 4.78 percent per annum in March 2018 up to 5.81 percent in December 2018 and 5.90 percent in March 2019.

In the same time, effective interest rate – including all the bank fees – for the same type of loans rose from 5.18 percent in March 2018 to 6.11 percent in March 2019 – meaning that an average mortgage loan became 18 percent more expensive.

For consumer loans in local currency granted to individuals, interest rates were more stable but the average effective rate rose from 10.57 percent in December 2018 up to 10.97 percent in March.

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The situation is similar for businesses that are forced to borrow money at much higher costs. The average interest rate for new loans in local currency – with a value of maximum EUR 1 million – granted to companies in Romania increased up to 6.45 percent in March 2019, from 6.15 percent in December 2018 – a cost increase by 5 percent in 3 months.

This trend has already harsh consequences for the business environment, analysts say.

“New lending has been driven in 2018 by mortgages and corporate loans in RON, supported by state guarantees and expanding activity in real estate and retail. Both factors are weakening in 2019. Despite borrowing costs in RON rising, there has been no move to FX lending in a sign that loan demand is falling,” Dan Bucsa, UniCredit’s chief CEE economist, said in a recent report.

Experts estimate that some vulnerable borrowers will become unable to meet their payments, and this situation will translate into higher non-performing loans (NPL) in 2019, from 4.95 percent in December 2018 – the lowest level since the financial crisis.

Experts forecast that the 3-month ROBOR will peak somewhere close to 3.5 percent this year if the inflation rate begins to decelerate, but it could reach 4 percent if inflation continues to rise.

Rising distress

And rising borrowing costs could hit Romanian companies even harder due to structural problems.

A recent CITR Group report showed that 51 percent of Romanian companies are in distress, overtaking the number of healthy businesses.

According to CITR Group, 49 percent of companies are considered to be financeable, 30 percent can be restructured, while 21 percent are insolvent.