Foreign capital inflows to Romanian banks will double next year after the restrictions imposed on foreigners making deposits in ROL at Romanian banks are lifted, said Misu Negritoiu, deputy chief executive of ING Bank Romania, who attended Ziarul Financiar's banking seminar yesterday.
The lifting of the ban on deposits by foreigners from April 2005 represents one of the most important steps in the deregulation of the capital account, which must be completed by the time Romania joins the European Union. Deposits by non-residents could there reach 2bn euros by next year.
"In 2005, foreign capital inflows in banking deposits will double at least,"
Negritoiu said. Non-residents invested several hundred million euros in the market in the third quarter alone by bypassing the ban to be lifted next year. At present, non-residents, especially western European banks, are investing in Romania through trading companies set up especially for this purpose. The foreign capital inflows in the "errors and omissions" chapter of the balance of foreign payments, in Q3 this year amounted to 700 million euros, compared with last year when the "errors and omissions" account witnessed outflows.
Cristian Popa, vice-governor at the National Bank of Romania, estimates that there were some 235 million euros of investments by non-residents in the banking system. "Approximately one third of this amount accounts for current account inflows, with most of the rest being capital operations such as property investment," Popa explained.
Foreigners are attracted to the high interest rates on the Romanian market compared with the forecasts for a low level of depreciation of the ROL against the dollar and the euro over the next few years. "In the next two years, Romania will be the best playing field for those that want to gamble on convergence," Negritoiu said. Every country whose economy has been converging with that of the EU in recent years has experienced high interest rates compared with the foreign exchange rate. The spread between the real yield of a deposit in ROL and that of a deposit in euros is currently 8-8.5%, compared with approximately 4% in Hungary and Poland, both of which have already joined the EU.
The danger of these capital inflows from abroad, the phenomenon of "hot money" as it is called on international markets, is that it can take off as readily as it arrived when interest rates are no longer satisfactory, and this puts pressure on the exchange rate.
In fact, the National Bank's decision to allow the exchange rate to fluctuate freely could discourage some of these inflows since the exchange rate will be harder to anticipate in the short term.
Further to this, according to Popa, the decline in sovereign risk, the relative absence of financial instruments and the short-term interest rate cuts will shield Romania in the short term from massive capital inflows with potential high volatility.