I know that it sounds grand and dramatic. Mainly in Romanian, as in the Anglo-Saxon financial literature the notion of „wealth destruction” does not herald a piece of tabloid news. The concept is as serious as it gets, discussed in earnest and debated even at academic tables. A Reuters title announced that 2008 alone saw a $11.2 trillion fall in household wealth in the US. Later, in 2009 they lost a further $14 trillion. That is the GDP equivalent of the US in 2008. It was the result of collapsing interest rates, stock and property markets. These are the exact factors that will eventually lead to the erosion of households wealth in Romania as well.
The question on the lips of many is: is it possible to talk about wealth destruction in a steadily growing economy, in a country with double-digit wage growth? The answer is “Yes, it is”, even in an economy such as this, household wealth can be wiped out by inappropriate economic decisions, and the mechanisms replicate those during the US crisis.
The setting out in the recent Emergency Ordinance, OUG114/2018 of the ROBOR rate at 2%, as the “normal” rate irrespective of the inflation rate, is to declare the erosion of Romanian household bank savings the norm. Although the ROBOR rate at which banks lend to each other, took the spotlight, there is another interest rate, called ROBID that banks charge each other for deposits. Just as the interest rate on loans granted by banks to customers exceeds the interest rate paid on deposits, the ROBOR rate is higher than ROBID. Therefore interest rates on interbank deposits, under the “normality” defined by the Emergency Ordinance should stay under 2%, even when inflation is 3% or more. In other words, their value will be eaten away by inflation and part of the wealth saved will vanish.
According to NBR [the central bank] statistics, household term deposits in November 2018 held in RON were worth 70 Bn. An interest rate of 1% below a 3% inflation rate on that amount would lead to a 700 million loss in household wealth in real terms. However, as a charge on bank assets will make them less willing to draw in deposits, it is highly likely that the difference between the inflation rate and interest rates gets even higher. At a 2% difference the household wealth loss stands at 1.4 billion Ron. That is the equivalent of having almost half a million average paid Romanians work for a month for free.
The prospects are worrying as inflationary pressures persist. The Hungarian and Polish cases show that additional taxes end up in prices.
Alas, wealth destruction is not confined to bank savings alone. According to research by the Romania’s Private Pensions Funds Association, the only saving method for over 50% of Romanians is the payment into Pillar 2, the mandatory pension contributions, which is under private management. These sole savings are invested by pension funds with a view to increasing their value. The stock market is one investment destination with pension funds exposure on Pillar 2 of around 19-20%. Under these circumstances, any market fluctuation is set to have major implications, both positive and negative.
According to Ziarul Financiar estimations, the fall in the Romanian stock market BET index by over 11% on December 19 caused by the OUG114/2018 decisions to levy more taxes on several industries, as well as the prospect at the time of forcing pension funds to make advance cash repayments to a significant number of contributors resulted in Pillar 2 assets, that is Romanian household wealth, to lose RON 1.5 billion in only one day. The current BET index is around the value that the stock market closed on December 19. This means that the wealth destruction started then is preserved.
There is, however, another category of the public whose wealth has taken a serious hit. Disgruntled by the negative yields on bank deposits, they placed their money in investment funds. Depending on their exposure to the Romanian stock market, they too saw their savings engulfed by the market collapse.
Will the market turn around? I cannot see how it could return to the same levels, if energy, telecommunications companies and banks have to price in their the significant additional costs that they will pay as taxes. The Romanian wealth placed directly or indirectly on the stock market will only be reset if a more business friendly legislation is adopted.
And finally, another defining element of household wealth anywhere is the value of their house. As a percentage, Romanians rank among the first in Europe in terms of home ownership. The problem is that the property market outlook is also dire. A study conducted by the President of the Romanian Association of Financial Banking Analysts, Iancu Guda, shows that the property market is bound to suffer a 20 – 30% correction as loans are more expensive due to the charge on bank assets, lending restrictions by the NBR, a wage freeze and negative demographic trends. In other words, another source for household wealth destruction in Romania is looming.
In the end, a question remains. A country is as rich as its inhabitants. Why not safeguard Romanians` wealth if we want a wealthy Romania?
Have a nice weekend!
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