CEEMEA TRANSCRIPT: Interview with Romanian Treasury Director General Stefan Nanu on 14 February 2024

26 February 2024

By Roxana Zabrautanu – BUCHAREST (Econostream) – Following is the full transcript of the interview conducted by Econostream on 14 February with Stefan Nanu, Director General of the Romanian State Treasury.

Q: Demand for bonds issued by Romania and other CEE countries seems to be very strong these days. How confident are you that demand amongst investors will remain robust so that Romania could hit its target of raising as much as €9.5bn from international markets this year?

A: Yes, first of all, I think it’s easy to answer this one because our first transaction for this year, which was executed in January, showed what is the demand related to the Romanian credit risk. We had this dollar deal in two maturity tranches, 5-year and 10-year, and we issued $4 billion based on the back of very strong demand, close to $15 billion. This transaction generated huge interest. And, by the way, based on this demand, we were also able to cut the initial spread indicated when we launched the transaction by 30bp, and we succeeded in getting this deal done with a minimum new-issue premium. On the 5-year, it was close to the yields on the curve, so just about 2bp in new-issue premium, and for the 10-year it was about 5bp premium, while other issuers around us in the CEE paid higher new-issue premiums. Of course, another aspect to be considered is that we aim for diversification this year. We are going to bring new instruments that we are very sure will create a lot of attractiveness. We will for the first time issue ESG-type bonds, green bonds. The green bond framework was elaborated and published last year on our website, but it was recently approved last week via government decision and is published now in the Official Gazette. Now we have the whole, let’s say, needed legislative framework for us to issue the first sovereign green bonds for Romania. We are also contemplating issuing another instrument this year, also for diversification benefits, to expand into the new investors which would be our first inaugural samurai bond. We might put also an ESG tranche in that samurai bond, that is a specific bond to be issued in the Japanese market, and we are aiming to have mostly Japanese investors in those bonds.

Q: What are potential factors that could weaken demand for Romanian bonds in the coming months? If you see any, could you please elaborate a bit more on both domestic and external factors.

A: Of course, there are two types of factors here. One is those exogenous to Romania, so generally speaking, the current markets are very sensitive to decisions, various statements or factors that could create volatility. And we saw, in the last few years, we had various events that were hard to predict like the Covid pandemic or the war in Ukraine – nobody expected that one – and all kinds of issues related to geopolitics that could create volatility, could influence the demand on us as well. We are investment-grade, but we are at BBB minus and, from that perspective, the demand could be influenced by such factors, such exogenous factors that could create volatility. Also, there is a lot of volatility created by the central bank’s decisions, including official statements about the monetary policies, particularly the important ones that are influencing all the markets, namely the Fed’s and the ECB’s. Of course, the expectations from the market are that, at some point this year, both the Fed and the ECB will start cutting rates. But this discussion is going back and forth and creates volatility depending on how soon they could cut. For example, yesterday the US CPI figures were published, and they were higher than the estimates, which immediately created volatility, the bond markets sold off and that’s influencing the market, the perceptions, and triggers a change across the board of all bond markets. These are exogenous factors. Now there are also factors that are very much related to Romania, the Romanian economy, and Romanian politics. We are going through a super electoral year in Romania, and everybody knows that, the investors know that, we have constant discussions with them and, they are watching us carefully from that perspective. Of course, nobody is expecting, this year in Romania, significant measures related to taxation. There was a clear announcement that there would be no tax measures taken this year. But in an election year, investors could expect more populistic measures, and depending on whether those types of measures might materialise, that could also influence fiscal position and implicitly the markets to some extent. Also, factors relate directly to economic developments are important, like GDP growth, which is also very much a strength for Romania from the rating perspective. EU funds and the way we have access to EU funds, that’s a positive for Romania and that’s also very important for the investors to see that the country is keeping our good track record of accessing EU funds both under the multi-year programming period, 2021/2027, but also under the Resilience and Recovery Facility.

Q: IMF senior representative for CEE Geoff Gottlieb recently said that “We are concerned that deficits may get stuck at unsafely high levels because of spending increases that are more permanent in nature.” Do you believe that those concerns also apply to Romania, given that the budget deficit is expected to remain above 4% of GDP at least until 2026?

A: Of course, it also could be a part of the answer to the previous question. The fiscal deficit is very important and it’s true that we deviated already last year and what the IMF representative mentioned was a deviation from the targeted level. So we targeted 4.4%, we achieved slightly below 5.7, that’s a fiscal slippage. That’s changing the whole fiscal consolidation path that was aimed at by Romania and which was discussed with the Commission. There will be discussions with the Commission probably on this new fiscal consolidation path because for this year, we target 5% of GDP, which is much higher than what was initially discussed with the Commission, initially the path was 4.4%, going to slightly below 3%. Now, because we ended up last year with 5.7, the budget is set up for 5% this year, so it’s already moved upward from this fiscal consolidation path, that’s usually not favourable for a country. We have to be mindful now of the context in which we are living, and we see around us that it’s not only Romania, but rather a lot of countries are experiencing fiscal pressure. Now we have to look at the very specific context of a country. Romania is also the only EU country which is in the EDP procedure. It is expected that this year more countries will join this group, but we started from the EDP procedure and for us, the discussion that will be pursued with the Commission is very important. And from that perspective, looking not only at this year but next year, we have to find ways to implement a fiscal consolidation across the years that will take us, in a much longer period, for sure, to what we agreed with the European Commission previously. And I would say that even the new fiscal framework that’s agreed nowadays by the EU countries is actually much more flexible from that perspective, from taking into account various factors that are influencing the fiscal position of the countries currently.

Q: Given that monetary policy is an important factor that influences demand for bonds, do you agree with the wait-and-see approach adopted by the National Bank of Romania, which is the only central bank in the CEE region that hasn’t started cutting interest rates yet?

A: I think that’s a prudent policy in a way, because just today, the fresh CPI figures for January were announced. Although the December figure showed a 6.6% level of inflation year on year, in January there is a bit of a jump, it’s a one-off and was flagged that it would be like this, but it’s a jump close to 7.4% because of the base effect from January last year and also due to some tax hikes kicking off this year. So in this case, you know the trend is disinflationary, that would give you room for potential rate cuts, but on the other hand, you don’t want to move so fast that it undermines your monetary policy strategy. So that’s why, from that perspective, our central bank is more prudent than others. It was more prudent also in hiking, and it’s more prudent now about cutting. The central bank was not that aggressive in hiking rates when everybody started hiking aggressively in 2022, so it was lagging a bit the others, which had much more aggressive hikes, and now when it’s time to cut, they show prudence.

Q: What impact on you, if any, will the ECB’s reduction and then termination of PEPP reinvestments have?

A: I think that has a direct impact on those countries and assets that were part of the PEPP, and for example some of the Romanian peers, some of the sovereigns in the euro area, they benefited by that program. The ECB bought a large part of the sovereign bonds issued by some countries like Slovenia, Slovakia, the euro area countries. And for a small market where you have a big buyer, a big constant buyer, that’s helping you to keep the cost down. So, you have a significant constant demand in your auctions. But based on that, all the countries and all the prices were dragged, all the yields were somehow dragged down and benefited by that policy. Now it’s important what the pace of that policy is, and it looks like the ECB is sticking to a cautious policy, so not an aggressive one. Also, it’s trying to manage this exit in an orderly manner that will not create too much volatility.

Q: What are the potential implications for you of interest rate cuts starting soon in the Eurozone?

A: I think if those are materialized that will be influencing, as I mentioned in the first answer, all bond markets. Usually, when you have rate cuts, that’s influencing more the short end of the curve, the short-end maturities but at some point, it’s influencing the whole yield curve. We see even the statements, for example, of ECB officials, saying that there are higher odds of a cut being the ECB’s next move, that’s already influencing the market without actually having the cut itself. So, to some extent, the expected cuts of the ECB are priced in nowadays, but when they materialise that will be seen also in the bond markets in a positive manner.

Q: Romania is situated right next to Ukraine. If the U.S. were suddenly to stop supporting Ukraine, leading to speculation of a Russian victory, how might this affect the attractiveness of Romanian government debt? Are there specific plans for such a case?

A: I will not enter into politics, but this goes into geopolitical developments that could affect the bond markets and they could affect the financial markets. It is true that Romania is in the proximity of the war, so we are neighbours with Ukraine, and from that perspective, our bond market and our assets together with the countries in the region are exposed to this volatility if there are important developments that might worsen or improve the perception of the markets, because it could go both ways, so positively or negatively. Other than that, I would not comment anything on politics.

Q: Conversely, would you expect a clear Ukrainian victory to make the sovereign debt of Romania and the entire region more attractive?

A: From the economic perspective, yes, and it will matter also what are the effects and how that will be translated in terms of the peaceful way of approaching the aftermath of such a victory. Any end of the war in Ukraine is influencing Romania positively. And if that’s done based on NATO and European efforts, and if Romania is part of the support, I think it would be favourably seen by the markets for sure.

Q: When might you next issue Eurobonds, and what are the medium-term plans for such issuance?

A: Of course, we are not announcing when we are issuing Eurobonds, because it’s not a smart move. Usually, the way we proceed is on the day when we make the decision to jump in the market, we announce it that day. We announced the plan for this year, the plan of issuing between €8.5 to €9.5 billion, and we issued already €4 billion. Usually, what we do, and we did it last year also, is practice this strategy of front-loading the funding requirements. From that perspective, one may expect that we will be issuing most of the Eurobonds in the first part of the year, but that depends also on the market context, because we want to have strong markets, and based on that, we will try to take advantage and to fill these funding requirements in a timely manner.

Q: Do you agree with the assessment that the Romanian currency is likely to depreciate slightly during the first quarter of 2024 due to weak growth?

A: I don’t think that’s the most important factor for a potential RON depreciation because, on the one hand, there are many factors that potentially might affect the appreciation or depreciation of RON. On the one hand, from the textbook perspective, a current account deficit particularly, one which is pretty significant in Romania, would honestly favour a depreciation rather than an appreciation. On the other hand, if you look at the inflows of euros in Romania due to the access to EU funds and absorption capacity, plus if you look at the way the current account deficit is funded via a lot of non-debt creating flows through the FDIs and EU funds, then that puts pressure on the appreciation of the currency. So, I will not necessarily link it to a potentially weak growth, but there are more factors. Moreover, we know again that we have a managed float. I think I would expect less volatility and more stability rather than appreciation of the currency.

Q: What do you think the share of foreign demand will be this year for Romanian government debt?

A: I think this year might be more stable, what we observed last year was a huge inflow, but it was also because we started from a low level, the level of offshores in the domestic government securities market was around 19% at the end of December 2022, and we ended up the year with about 26%. So, it’s quite a big jump, 7 percentage points, and that was because there was a clear perception of the investors that our curve is too inflated. So, imagine that at the beginning of the year, the RON curve was somewhere around 8%-8.5% last year, and we ended up between 6%-6.5%. So actually this bet, this perception was materialized. That’s why the investors were massively buying our papers at the beginning of the year, it was coupled with the expectations that the interest rate increases of monetary policy tightening were coming to an end and that we would enter a plateau of interest rates, after which we’d start going down with the rates. And that materialised, the rates were coming down despite the fact that we put a lot of supply, we issued a lot of papers, and yields were gradually going down from 8-8.5% to 6-6.5% for the whole maturity spectrum. This year, any movement of the curve will be much lower, the curve will be rather stable but we still expect a downward path. We still expect, based on how the central bank’s potential rate cuts will come and also based on the other important central bank decisions, that the curve could also go slightly down, but it will be much more stable, and from that perspective, we expect a much more stable structure of the demand between locals and offshores. I would say that the perception we have is that we will stay around the same level or even slightly going down, but we expect this like between 25 – 27%. I think it’s something reasonable.