US crisis casts doubt on local lending boom

Thousands of miles away from insolvent US borrowers, markets caught a glimpse of what a butterfly effect looks like when the most bullish capital investors became bearish and banks started fretting whenever the word “crunch” came up.
The effects of the crisis on the CEE region and especially on Romania are difficult to assess if one wants to look farther than stock exchange indexes.
Some analysts have their minds made up about the likelihood that the US mortgage crisis will be replicated locally not long from now.
“Absolutely, but not just yet. Romania is bound to repeat the experiences of the US, and, closer to home, those of Spain. But it won't happen anytime soon – it took the Spanish real estate construction boom a decade to work itself through before it collapsed; we're still at the beginning. The reasons for this [the imminent crisis] lie in the huge unmet demand that the real-estate sector is facing – it is inevitable that supply will overshoot demand. The seeds of its future collapse lie in its present success,” said Matei Paun, managing partner with BAC Investment Bank.
Other analysts brush off the likelihood of a similar crisis locally – at least for the foreseeable future.
“Such a crisis will not happen in Romania. While obtaining a mortgage in Romania has become easier over the past few years, there is no so-called ‘subprime' market here in Romania at the moment, and with demand in Romania continuing to outpace supply for at least the next two to three years, there is little chance of a similar crisis,” said Daniel F. Visoiu, partner with the Biris Goran law firm.
Banks categorically rebuff the likelihood of a similar crisis locally.
“Mortgage credit to households represents only 2.3 percent of the gross domestic product (GDP) in Romania and any correction of housing prices is unlikely to be transformed into a serious financial stability problem or affect economic growth,” said Ciprian Dascalu, senior economist with ING Bank Romania.
Furthermore, incomes are growing at rates above 20 percent year over year, house prices are booming, and margins on the real estate market are also quite generous, therefore a decline would not affect the population's payment capacity, said Dascalu.
Visoiu also predicted limited effects of the US crisis on Romania's mortgage market.
“Most likely Romanian banks will make it more difficult for Romanians to obtain mortgages because of these banks' greater costs in borrowing money from abroad, however, due to the still limited supply of housing in Romania, the Romanian real estate ‘bubble' will not burst just yet,” Visoiu said.
The same view was expressed by Rozalia Pal, chief economist with the UniCredit Tiriac Bank.
“The existing imbalance between housing demand and supply still provides a strong stimulus for construction, with no clear evidence of a house price bubble despite the fast growth observed in recent years, even though the Romanian real estate market might encounter risks of overheating in the medium term,” she said.
Moreover, economic factors such as growth and employment should continue to provide support, said Pal.
“A major disruption could only occur if foreign demand slows down. But given the well-filled war chests of real estate companies following huge capital increases in H1 2007, this scenario currently seems rather unlikely,” she added.
In addition, Dascalu pointed out the limited access to credit due to central bank (BNR) restrictive administrative measures, which means that the credit quality in Romania is very good.
Paun disagrees.
“Local banks do not have the experienced risk managers and credit officers in place to properly administer the bulk of their loan portfolios. The Romanian banking sector has never stress-tested its loan portfolio. When it does, it will discover a lot of unpleasantness. This will translate into stricter credit norms and higher interest rates,” said Paun.
He added that the US crisis has had no immediate effect on local banking, which is not necessarily a reason to smile.
“Banks are today lending as happily as they were three months ago. Is this a good thing? I don't think so,” Paun said.
“The trends all point to increasing volumes. The higher the volumes, the bigger the crisis. It is a matter of time. Romania may not get hit tomorrow, but it will go through something similar sooner or later,” said Paun.
The UniCredit Tiriac economist said the possibility of having banks running with their shoelaces untied was small, as the shock-absorption capacity of the “core” of financial system is very high.
“Bank exposure to ABSs [Asset Backed Securities] and CDOs [Collateralized Debt Obligations] until now seems to be negligible, given the banks' need to finance
credit growth in the region and realizing their expansion strategies in the fight for market shares,” said Pal.
“In light of foreign banks' dominant position in Romania, any negative impact could come only indirectly, via the involvement of parent companies in such business fields. But given the fact that the CEE banking markets are in particular dominated by foreign banks with a CEE focus (UniCredit Group, Erste Bank, Raiffeisen Bank, etc.), any noise from this side should also be limited,” said the UniCredit Tiriac chief economist.

Safe from mortgage risk, exposed on FX lending
What danger does not come from the mortgage market might come from booming forex lending figures.
“I foresee a risk in foreign currency denominated loans. The RON will depreciate; this I believe is inevitable. And when it does, a lot of borrowers will suffer. And borrowers never suffer alone, there is always a lender involved!” said Paun.
Pal described the effects on the RON that have already surfaced following the global turmoil.
“The current depreciation of the foreign exchange rate negatively affects loans denominated in foreign currency through higher reimbursements and interest payments expressed in local currency. Higher foreign exchange volatility may increase the risk aversion of the population and in this way loans denominated in local currency might become more attractive, discouraging lending in FX,” said Pal.
Dascalu said more expensive credit conditions and the subsequent policy tightening of around 50 basis points for the Eurozone and the US would also make the financing of the current account deficit of 13.2 percent of GDP at the end of the second quarter more expensive, with FDI financing declining from 91 percent at the end of 2006 to 65 percent currently.
On the retail side, the ING Bank analyst said there was a very low chance of Romanians having a consumer-loan equivalent of the US mortgage crisis.
“Increasing incomes along with higher welfare would probably reduce close to zero the probability of such a crisis, except for the case of a major global meltdown. We also have to take into consideration that since the RON decoupled from its fundamentals in December 2006 only a small part of the total outstanding FX credit was approved,” said Dascalu.
“Such a scenario is highly unlikely in Romania which had a financial intermediation of only 27 percent of GDP at the end 2006,” he added.
Visoiu brought another argument to the plate.
“According to most estimates, between EUR 4-5 billion in remittances is sent back to Romania on a yearly basis, thus there will be no lack of funds to pay off these consumer loans in the foreseeable future,” said the Biris Goran partner.

BSE holds up well
There might have been a lot of blood on Wall Street in the past few months, but the Bucharest Stock Exchange (BSE) so far managed to come out fairly clean from the crisis and is holding up well compared to markets in the region.
“The main indexes still post annual growths above 20 percent, while most regional markets post an average 10 percent increase. The Prague stock exchange index went up 12 percent, while those in Budapest and Warsaw increased by 10 percent and nine percent respectively,” said Adi Lupsan, analyst with Intercapital Invest.
However, if the global crisis worsens there will certainly be an increase in negative variations on the BSE, he added.
Unless new significant information from international markets emerges, the increased volatility on emerging markets will settle down, said Cristian Tudorescu, head of research with the Vanguard brokerage company.
“The most probable scenario at this point is that the stock exchange market will go through a consolidation period, and finish up the year on an upward trend,” said Tudorescu.
When mature markets stabilize, the emerging ones will follow, said Lupsan, who added that it is difficult to pinpoint the exact time when that might happen.
“Some say that we are witnessing the mere beginning of a crisis which will last for at least a few more months. Others say that volatilities on the main financial markets have decreased, and a durable upward trend is setting in,” said Lupsan.
So far, companies listed on the BSE have resisted the crisis in different ways, depending on how external factors have combined with local ones.
“In SNP's case, the correction of emerging markets coincided with the publication of poor half-year results, which amplified the negative effects on the share price. At present SNP is 10-15 percent lower than the maximum level reached in July,” said the Vanguard analyst.
At the other end of the rope are solid companies, which have fluctuated within smaller intervals.
“The biggest of the listed banks, BRD, is now only 5 to 6 percent lower than its maximum level,” said Tudorescu.
“This is new proof that in the event of an international shock, blue chips have the tendency to first drop en masse, after which their financial results and local contexts are decisive for their comeback speed,” said the analyst.
Predictions about the future of global capital markets are difficult to make due to the numerous
variables that might alter their indexes. As it is now, stock exchange investors are not totally off the hook.
“One of the determining factors [for a local correction] is the FED meeting regarding the benchmark rate scheduled for September 18. So far, there have been two corrections this year on the BSE, in February and in August, which might
reappear if volatilities on the US mortgage sector persist,” said Lupsan.

Ana-Maria David

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