BNR calls increasing global uncertainty, rapidly declining investor confidence risk to financial stability

The most important systemic risk to financial stability in Romania moving forward is the rise in global uncertainty and fast deterioration of investor sentiment towards emerging economies, according to the June 2020 Financial Stability Report released by the National Bank of Romania (BNR) on Monday.

"Current assessments signal two severe risks to financial stability in Romania: a rise in global uncertainty and fast deterioration of investor sentiment towards emerging economies, and the worsening of domestic macroeconomic equilibria, also in terms of the structure and financing cost of the budget deficit. There is a third factor with an impact on financial stability that stands at a high level: the risk of an uncertain and unpredictable legislative framework in the financial and banking sector. Two other risks are moderate and refer to: the default risk for loans to the private sector, and access to finance of the real economy," reads the report.

BNR also says that since the previous Financial Stability Report, systemic risks to financial stability in Romania have increased substantially, similarly to developments in Europe and around the world. The outbreak of the COVID-19 pandemic has had serious negative economic, social and financial consequences, prompting national and international authorities to take swift measures. The mix of actions has ranged from monetary to prudential and fiscal solutions.

The COVID-19 pandemic took a heavy toll on all sectors of economic activity and triggered a significant rise in uncertainty and a fast adjustment of risk premia on financial markets, with the containment measures leading to bottlenecks in supply chains and a sharp contraction in demand, whereas financial markets faced marked increases in volatility and notable asset price adjustments. The pandemic crisis may also be an opportunity for implementing structural measures to place Romania into a novel paradigm of more sustainable, innovative and resilient economic growth.

According to BNR, the most important systemic risk to financial stability in Romania moving forward is the rise in global uncertainty and fast deterioration of investor sentiment towards emerging economies.

The second severe systemic risk refers to the worsening of domestic macroeconomic equilibria, also in terms of the structure and financing cost of the budget deficit. Economic activity is expected to post a significant downturn this year, following the COVID-19 pandemic effects on both demand and supply, according to the report.

Forecasts by European and international institutions show a contraction in Romania's economy by up to 6 percent in 2020, before GDP dynamics returning to positive territory in 2021.