BR Analysis. Hard times for Romanian borrowers in 2019: loans becoming much more expensive eroding profits and purchasing power

The business environment and households are hit by surging borrowing costs as interest rates rose quickly during the last year, eroding the profits of companies and the purchasing power of indebted persons.

Fresh central bank data suggest that the age of cheap credit is gone. In the case of households, the average interest rate for new loans in local currency rose from 7.84 percent per annum in February 2018 up to 8.60 percent in February 2019 – meaning that an average loan became 9.7 percent more expensive.

But the situation is even worse for businesses that are forced to borrow money at much higher costs. The average interest rate for new loans in local currency granted to companies in Romania increased up to 6.18 percent in February 2019, from 5.02 percent in February 2018 – an increase by 23 percent.

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.

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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 the current 6 percent level – the lowest since the financial crisis.

“The (higher interest rate) shock will hit harder the borrowers on the edge, the riskiest for banks. This is the first group to fail to meet their loan repayments. In 2019, we could see two-digit NPL rates,” Iancu Guda, president of the Romanian Financial Analysts Association, recently warned.

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.

Structural vulnerabilities

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

According to a recent analysis by Guda, in a moderate scenario, one in three companies in Romania faces the risk of becoming insolvent due to rising borrowing costs.

The main reason is the low level of operating profit, coupled with the aggressive policy of paying dividends.

“In the context of rising financing costs, some companies will find themselves in a very difficult situation, as operating profit will become insufficient to cover interest on loans,” Guda cautioned.

The situation worsened in 2018 due to higher inflation, which hit a five-year high of 5.4 percent in May and June, and wage pressure, translating into higher expenses for firms.

“In addition to increasing insolvencies, companies will be tempted to extend supplier payouts using the rise in lending rates as an excuse, and Romania already has the highest payment terms in the region,” Guda said.

In this scenario, Romanian companies could enter into a vicious cycle of commercial credit, using suppliers as creditors. Goods or services are received on deferred payment terms, so suppliers face higher risks of non-payment.

In an optimistic scenario, companies will be forced to clean up their balance sheets to cope with higher borrowing costs.

In Romania, business owners often charge their personal expenses to the company, and these costs are estimated at 22-23 percent of total expenses, on average.

The effect of this business behavior is lower profit declared by the companies – and lower taxes to pay to the state budget.