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March

2015

INVESTMENTS
HIGHLIGHTS
Local economy

Real GDP growth in the last quarter of the year (0.5% qoq and 2.6% yoy)
was supported by the acceleration of private consumption (+2.4% qoq).
The performance of gross fixed capital formation remained weak in Q4
(-0.8% qoq, 1.4% yoy), while net exports had a negative contribution to
GDP growth rate in Q4 due to a faster dynamics of imports than of exports.
Consumer prices increased by 0.3% mom in February, mainly determined
by dynamics of fuel prices (+1.9% mom when including both the solid and
the liquid fuels) and also seasonal increase of prices for fruits, vegetables
and eggs (+3.1% mom). The annual inflation rate stood at 0.4% yoy in
February and we expect a level close to 0.5% yoy in the following months
(March-May).
NBR expected to end the key-rate cutting cycle (re)initialized in August,
after delivering a last 25 bp cut (to 2%) at the monetary meeting on 31
March.

Global economy

At the monetary policy meeting on 18 March, Fed gave up patience


language and lowered the forecast for the fed funds target rate level at the
end of 2015, by 50 bp, to 0.625%. However, it was emphasized, as
expected, that despite the changed wording the key rate did not have to
rise automatically but was rather subject to further labor market and
inflation developments.

The European Central Bank started the purchase of government bonds on


9 March. The bond purchases initially set until September 2016, of EUR 60
bn per month are supposed to be continued until a sustainable
development of the rate of inflation towards the ECBs inflationary target
can be identified. Also, ECB presented new forecasts for GDP growth and
inflation rate in 2015-2017.
March 2015

Content
Local Economy
Global Economy
FX Market
Money and Bond
Market
Equity
Commodities

LOCAL ECONOMY
GDP growth in Q4 driven by private consumption

Contribution to real GDP growth (pp)


20

Inflation rate in February matched our expectations


Consumer prices increased by 0.3% mom in February,
while the annual inflation rate stood at 0.4% yoy. This
was in line with our expectations and slightly above
analysts consensus in a Thomson-Reuters survey (0.3%
yoy). Inflation rate dynamics in February was
determined mainly by the increase in fuel prices (+1.9%
mom when including both the solid and the liquid
fuels) and by the seasonal increase of prices for fruits,
vegetables and eggs (+3.1% mom). CORE 3 inflation
measure total CPI excluding administered prices,
volatile prices of foods and fuels, prices for tobacco
and alcohol was flat in February (0% mom), but
benefitted also from leu appreciation.

15
10

2.6

-5
-10
-15
-20
08Q4

10Q2

11Q4

13Q2

14Q4

Household consumption (pp)


Public consumption (pp)
Gross fixed capital formation (pp)
Inventories (pp)
Net export (pp)
Real GDP (%, yoy)

Source: EUROSTAT, Raiffeisen Research.

Dynamics of consumer prices, contribution of


main categories of products
10.0
8.0
6.0

(pp, %)

New estimates of real GDP growth in Q4 (published by


the National Institute of Statistics) confirmed the flash
figures of 0.5% qoq and 2.6% yoy. Overall, in 2014, real
GDP advanced by 2.9%. In line with our expectations,
the quarterly GDP advance (0.5% qoq) was driven by
domestic demand with private consumption
accelerating in the last quarter of the year (+2.4% qoq).
In addition, private consumption had also the most
important contribution (2.5 pp) to real GDP advance of
2.6% yoy in Q4. On the other hand, the performance of
gross fixed capital formation remained weak in Q4
(-0.8% qoq, 1.4% yoy). Furthermore, faster dynamics of
imports than of exports resulted in a negative
contribution of net exports to the quarterly and annual
GDP growth rate. On the supply side, all economic
sectors had positive annual contributions to the real
GDP growth in Q4. Moreover, gross value added in
agriculture went up by 5.2% yoy, while industry
recorded an advance of 1.9% yoy. Gross value added in
the construction sector posted an increase by 2.6% yoy
in the last quarter of the year, probably helped by a
strong rebound of this sector in November-December.
We expect real GDP growth in 2015 to come close to
3% and to be further driven by domestic demand
supported by the rise of real wages and the
improvement of sentiment among consumers.

4.0
2.0
0.0
-2.0
Feb-10

Feb-11

Food

Feb-12

Nonfood

Feb-13
Services

Feb-14

Feb-15

CPI - Total

Source: National Institute of Statistics, Raiffeisen Research.

March 2015

Inflation dynamics in the first two months of the year erased the chances for a negative print of the annual
inflation rate in the following months. Moreover, inflation rate would remain close to 0.5% yoy during MarchMay before entering on an upward trend. In our baseline scenario, the annual inflation rate would end the
year at 2.0% yoy. However, uncertainty with regard to dynamics of inflation is high due to strong sensitivity to
supply side shocks.
Positive news from real sector indicators at the beginning of the year, with the exception of construction
works
In seasonally adjusted terms, retail sales increased by 1.6% mom in the first month of the year, driven by an
important monthly advance of sales of food products (+3.2% mom). In annual terms, retail sales posted an
advance by 6.8% yoy in January 2015, mainly supported by the acceleration of sales of food products (+7.6%
yoy), while sales of non-food products posted an annual dynamics of 4% yoy and sales of fuels showed an
increase of 5.2% yoy. Industrial production increased by 0.9% mom in January, exclusively driven by
performance of the manufacturing sector (2.9% mom). Our in-house seasonally adjusted data shows that
exports of goods went up by 2.1% mom in January when expressed in EUR equivalent, another positive piece
of information regarding the performance of the economy at the beginning of the year. Imports of goods
increased also in January, but at a slower pace (+0.8% mom in euro equivalent according to our in-house
seasonally adjusted data). Construction works fell by 5.4% mom in January, but negative performance came as
a correction of the surge in the last two months of 2014 (+5.4% mom in November and + 7.0% mom in
December).
Short-term indicators
% mom
Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Industrial output

-1.2

1.5

0.5

-0.2

0.1

0.9

Manufacturing output

-0.2

1.5

0.5

1.6

-0.9

2.8

Retail sales, real terms

0.2

-0.4

0.5

2.3

0.4

1.6

Turnover in market services for population

2.6

-3.9

-1.0

1.4

-2.2

3.3

Turnover in market services for enterprises

-0.8

4.2

-2.0

1.3

-0.3

2.1

3.1

7.1

-5.9

5.4

7.0

-5.4

-9.9

2.0

-3.3

5.1

-1.7

11.7

Construction output
New passenger cars sales
Unemployment rate (%)

Feb-15

5.27

5.26

5.19

5.10

5.09

5.09

5.10

Economic sentiment index (level)

101.2

99.9

101.5

101.6

101.8

102.3

102.6

Consumer sentiment index (level)

-27.5

-29.4

-26.0

-20.9

-18.6

-15.8

-15.8

Source: National Institute of Statistics, European Commission, Automotive Manufacturers


and Importers Association, National Agency for Employment, Raiffeisen Research.

NBR to deliver the last 25 bp cut of the key interest rate at the monetary meeting on 31 March
Our baseline scenario assumes the NBR would end the key-rate cutting cycle (re)initialized in August at 2%,
after delivering the last 25 bp cut at the monetary policy meeting scheduled for 31 March. Also, the NBR
should narrow the spread between the interest rates for the permanent credit and deposit facilities to 3.5 pp
(from 4 pp at present). In our view, the inflation outlook (i.e. inflation rate forecasted in one year from now) is
the primary factor shaping the central banks decisions on the monetary policy rate path. The sentiment of
investors towards RON assets and the level of inflation rate at the time of the monetary policy decision are
both weighed by the central bank when setting the monetary policy rate, but not as primary factors. The last
inflation forecast of the NBR for end-2015 is at 2.1% yoy, while it is assumed an inflation rate of 2.3% yoy at
the end of Q1 2016. Therefore, we see this forecast as clearly limiting the room of the central bank to reduce
the monetary policy rate to below 2.0%.

March 2015

GLOBAL ECONOMY
US Labor market remained strong
Non-farm payrolls increased by 295K in February - a
level above market expectations of 235K in a
Bloomberg survey. In this context, the cumulated
downward revision of the increase in the two
preceding months (18k) was easily offset. In the last
twelve subsequent months, more than 200k new jobs
were created every month - a notable dynamics,
previously seen in 1994. Furthermore, the
unemployment rate dipped by 0.2 percentage points to
5.5% in February. If the employment continues to grow
even close to the rate of the past three months, in
which in average 288k new jobs have been created, the
Feds full employment target of 5.35% should be
achieved in Q2 2015 and by the end of 2015, Raiffeisen
Research Analysts expect the rate to lower to 4%.

US labour market

Source: Reuters Datastream, Raiffeisen Research.

US ISM manufacturing index fell slightly in February


to 52.9 points
In February, the ISM index for the manufacturing
sector dropped by 0.6 points to 52.9 points. The minus
is primarily attributable to significantly reduced
production (-2.8 to 53.7 points) as well as a
deterioration in the employment component (-2.7 to
51.4 points). Over the past four months, the ISM index
saw an overall fall by 5.0 points, but clearly overstates
the actual worsening of the situation. The
manufacturing sentiment deterioration is likely to be
less of a problem of insufficient demand and orders,
respectively, but mostly due to delivery and shipment
difficulties through crucial West Coast ports. However,
the labor dispute between longshoremen and port
operators on the West Coast is very likely to be a
temporary phenomenon and not the beginning of a
lasting slowdown in economic activity. By contrast,
sentiment in the non-manufacturing sector improved
further, with the corresponding indicator inching up by
0.2 to 56.9 points in the second month of the year.
These two indicators still support an increase of the
real gross domestic product of around 3% for the
current year.

US-ISM Indices

Source: Reuters Datastream, Raiffeisen Research.

March 2015

US Fed gives up patient wording


In line with expectations, the FOMC adjusted its language and dropped the patience wording with regard to
the normalization of the monetary policy. The Committee now judges that an increase in the target range for
the federal funds rate remains unlikely at the April FOMC meeting. Moreover, it was emphasized as expected
that, despite the changed wording, the key rate did not have to rise automatically but was rather subject to
further labor market and inflation developments. All in all, the requirements for an initial interest rate hike in
June would be fulfilled in our opinion. However the FOMC also delivered new forecasts for the appropriate fed
funds target rate level at the end of 2015. And according to that chart the median fed funds target rate will
stand at 0.625% in December. That is 50bp or two small rate hikes less than FOMC members had anticipated
in December 2014. That means that FOMC members on average expect just two rate hikes both worth 25bp
during 2015. Therefore, it appears that the likelihood for a June lift-off has diminished. If the first rate hike
really was to happen in June then there would be just one more hike from July through December. It would be
really unusual for the Fed to start hiking rates and then pause three meetings before raising rates again. So
according to the FOMC forecast for the appropriate fed funds target rate for end-2015, a rate hike in
September followed by one in December looks clearly more likely than one in June and another one not until
six months later.
EU: ECB started the purchase of government bonds
At its monetary meeting on 5 March, the ECB has left its main refinancing rate unchanged at 0.05%. The
deposit rate remains at -0.20% and the marginal lending rate stays at 0.30%. The bond purchases (covered
bonds, asset backed securities, agency bonds, bonds issued by international and supranational institutions as
well as government bonds), initially set until September 2016, of EUR 60 bn per month are supposed to be
continued until a sustainable development of the rate of inflation towards the ECBs inflationary target can be
identified. Also new details have been announced: (i) the purchase of government bonds should start on the
9th of March, (ii) the yield of purchased bonds should at the time of purchase not be below the deposit rate,
(iii) the national central banks will only be active on their domestic markets, only on the secondary market and
not on the primary market. Also, the ECB presented new forecasts for real GDP growth and inflation rate for
the euro area. ECB increased estimates for the real GDP growth from previous levels announced in December:
of 1.5% in 2015 (vs. 1.0%), 1.9% in 2016 (vs. 1.5%), 2.1% in 2017. Forecasts for the inflation rate were adjusted
as follows: 0% in 2015 (vs. 0.7%), 1.5% in 2016 (vs. 1.3%), 1.8% in 2017. The estimates have been adjusted due
to a change of the expected development of the oil price and regarding the year 2016 also due to the
expected influence the most recently enacted monetary policies will have.

March 2015

FX MARKET
The EUR/RON exchange rate continued to trade in a narrow range in the last month, with recent visible signs
of the leu appreciation, due to higher flows, probably influenced by US Fed wording (on 18 March) with regard
to the normalization of the monetary policy rate. However, the leu has retreated close to 4.44, a level around
which we expect fluctuating vs. EUR in the coming days. Flows related to transactions in RON T-securities
should remain the main drivers of the leu exchange rate. The anticipated 25bp key rate cut on 31 March
should not have any tangible impact, neither on market interest rates nor on the leu exchange rate. We think
the move is broadly expected by market participants.
Regional exchange rates

Recent dynamics of RON exchange rate


108
106
104
102
100
98

EUR/PLN

EUR/HUF

EUR/CZK

EUR/RON

Mar-15

Feb-15

Jan-15

Dec-14

Nov-14

Oct-14

Sep-14

Aug-14

Jul-14

Nominal appreciation
96

Source: Bloomberg, National Bank of Romania, Raiffeisen Research.

MONEY AND BOND MARKET


In February, the Finance Ministry borrowed around RON 5.3 bn in T-bonds and T-bills with an average maturity
of five years issued on the local market. In March, the Finance Ministry plans to borrow RON 3.1 bn in Tsecurities (RON 1.5 bn in T-bills and RON 1.6 bn in T-bonds) when excluding supplementary auctions, with a
lower average maturity (3.1 years). Redemptions of RON 2.1 bn are due on late-March, which means that the
Finance Ministry would continue to drain the liquidity out of the money market in the last month of Q1.
In March the Romanian yield curve (along with regional peers, Poland and Hungary) was more correlated with
UST dynamics, being impacted by several upward pressures. Therefore, the auctions in March were influenced
by these dynamics. The Finance Ministry (MoF) borrowed RON 1.6 bn until the cut-off of this report (19
March). The MoF borrowed RON 300 mn in T-bonds with a residual maturity of 6.3 Y at an average yield of
2.60% (on 5 March) and RON 500 mn in T-bonds with a residual maturity of 4.3 Y at an average yield of 2.35%
(on 9 March). It also borrowed RON 200 mn in 10Y T-bonds at an average yield of 3.09% (on 12 March) and
RON 300 mn in 2.8 Y T-bonds at an average yield of 2.08% (on 16 March). After yields on CEE debt markets
March 2015

moved lower after wording of US Fed on 18


March, the auction in the following day recorded
strong demand and the MoF borrowed the
planned amount of RON 300 mn in 5.1Y T-bonds
at an average yield of 2.58%.
The money market interest rates continued to
trade at levels substantially below the key rate in
the last month, supported by a still large liquidity
in the banking system. In the coming period,
prices of RON T-securities should remain
supported by the quantitative easing measures
implemented by the European Central Bank (i.e.
purchases of Euro area sovereign bonds starting
from March). The expected monetary policy
easing to be delivered by the Romanian central
bank (25bp cut of key rate to 2.0% on 31 March)
bodes also well for prices of RON T-securities.

Yields for RON government securities (%, mid)


4.00
3.50
3.00
2.50
2.00
1.50
1.00
6M

1Y
20.03.2015

3Y

5Y

10Y

23.02.2015

Source: National Bank of Romania, Reuters fixing.

Yields for RON government securities (%, mid)

Non-residents exposure in RON T-securities


recorded a slight decline in December, amounting
to RON 19.5 bn (EUR 4.4 bn in equivalent).
Holdings of non-residents in RON T-securities
improved in Q2, recording a peak of RON 20.7 bn
in June (or EUR 4.7 bn), while in the second half of
the year stabilized around the monthly average
level of RON 19.2 bn. The exposure of foreign
investors in local government securities remains
much below the levels recorded in Hungary and
Poland.
Source: National Bank of Romania, Reuters fixing.

March 2015

EQUITY
Enel announced officially in February that it suspends the sale of the Romanian assets. We remind that
Electrica and Nuclearelectrica were among the bidders. Also regarding Electrica, Fondul Proprietatea
announced that they hope to reach an agreement by the end of 1Q for the sale of its stakes in Electricas
subsidiaries, so further news should be available soon. Fondul Proprietatea called a GSM on April 27 to
approve among others a sixth buy-back program of 891.8 mn shares (8% of its share capital). Most of the SIFs
have announced their 2014 dividends proposals, to be voted during their annual April GSMs. SIF Banat-Crisana
(SIF1) would resume cash distributions with a 2014 DPS of RON 0.1 (DY 7.5%), while SIF Oltenia (SIF5) would
pay RON 0.12 per share, yielding 7.1%. SIF Moldovas (SIF2) management has submitted a DPS proposal of
RON 0.102 (DY 6.5%), combined with a stock dividend (one free share for every share owned), and a buy-back
program for 1% of outstanding shares, which would be distributed to the management and employees. SIF
Transilvania (SIF3) would resume cash dividend payments this year with a DPS of RON 0.0125 (DY 4.7%),
combined with a buy-back program for 1% of total number of shares, in similar conditions to SIF2. We
calculated dividend yields based on closing prices from March 18.

COMMODITIES
Oil market
After the price of Brent had exceeded USD 60 mark
in late-February, the price entered again on a
downward trend and is trading now close to USD
54. Also, the price of WTI decreased by 17% since
the monthly peak at the beginning of March. The
Kuwait Oil Minister, quoted by Bloomberg, said that
OPEC members do not plan to meet in an
extraordinary session earlier than the next one on
the agenda (in June). In February, OPEC oil
production has slightly exceeded the target of 30
million barrels a day, for the ninth month in a row.
Additional export volumes, which could enter the
market already this year, would be difficult to
absorb by a currently oversupplied oil market, even
though the supply/demand situation would be
significantly more balanced in the second half of the
year than it is now. Raiffeisen Research analysts
consider that during the second half of the year the
growth of shale oil production will slow down
significantly, a move that will help the oil price.

Oil price
120
110
100
90

80
70

60
50
40
20-Mar-14

20-Jun-14

20-Sep-14
Brent

20-Dec-14

WTI

Source: Bloomberg, Raiffeisen Research.

March 2015

20-Mar-15

This report was completed on 20 March 2015.

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This document was realized by Raiffeisen Bank S.A. for information purposes only. Raiffeisen Bank S.A. believes all the
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March 2015

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