The shock of the first round of the presidential elections produced net outflows of foreign investors of RON 5billion in government securities

The shock result of the first round of the 2024 presidential elections produced net outflows by non-resident investors in lei-denominated government securities issued on the domestic market of around RON 4billion, according to Finance Ministry data consulted by https://cursdeguvernare.ro/.   In November 2024, month when these capital outflows made the National Bank of Romania (BNR) intervene on the foreign currency market, the non-resident investors had net outflows of 4.3 billion lei, while in December, month when the first elections round was annulled, there were net inflows of 424 million lei.   At the same time, non-residents' exposure to euro-denominated government securities issued on the domestic market declined from EUR 438.6 million (15.3% of the total) in October 2024 to EUR 227.6 million (8.1% of the total) at the end of 2024, with sales adding the equivalent of a further RON 1 billion to net outflows.   At the same time, non-residents had net outflows of 3 billion lei in October which announces a last quarter of 2024 with net outflows of the foreign investors from lei-denominated and euro-denominated government securities on the domestic market of approximately 8 billion lei, at a total of the market of about 394 billion lei (nominal value) on 31 December 2024, including euro-denominated securities with an equivalent value of around 14 billion lei.   November was a month of risk aversion in local financial markets, marked by increased volatility in the stock, currency and government bond markets. The increase in risk aversion came as a result of the first-round of the presidential elections, when the nationalist, pro-Russian candidate Calin Georgescu came in first place and the political risk of fragmentation.   At the same time, banks' exposure to lei-denominated government securities fell to 41.4 per cent of total securities outstanding in November 2024 from 42.1 per cent in October, after net outflows of nearly RON6.58 billion, according to data released by the Finance Ministry.   Later, in December, the banks’ exposure went up to 41.8% of the total securities in lei issued on the domestic market with a value of sectorial exposure of 158.7 billion lei, after net inflows in December of 5.27 billion lei. The most traded government securities in lei in November and December were the short-term bonds maturing in October 2026 (RON7NMKOKQG2) and issued in April 2023, which recorded a high volume of around RON 37 billion in November and around RON 57 billion in December, well above the historical average.   At the same time, bonds maturing in January 2026 (RO7EKTXSRHD6 - issued in December 2023) totalled about RON 10bn in November 2024 and about RON 11bn in December. On the other maturities traded in November and December, volumes were within historical averages (several billion lei).   The sales of the non-resident investors continued most probably in January, judging by the increasing trend of interest rates to government securities on secondary market – sovereign interest for ten years surpassed at mid-January, for a short period of time, the threshold of 8%. Later, after the finalization and publication of the budget, namely after the first loan on foreign markets, the interests went back to a decreasing trend, with RO10Y at present at 7.4% with 70-80 basic points under the maximum of January.   The outcome of the first round of the presidential election led to a rise in uncertainty and the sovereign risk premium, which reduced government bond borrowing in November and December amid reduced demand. The National Bank of Romania (NBR) also had to intervene in the foreign exchange market and be active in the market by buying lei after the first round of the presidential elections so that the euro/ lei exchange rate did not go above 5 lei.    ‘The leu stability is expected to continue in 2025 as well, supported by BNR intervention. We see a possible slight depreciation, most probable in the second half of the year, if the economic situation allows it’ the BCR analysts say.   To be noted that, in October the banks had net inflows of 6.3 billion lei in government securities, which increased the total exposure of the banking system at 164.95 billion lei, a historic maximum from the point of view of gross sums.   As a whole, in December the bank’s exposure on leu-denominated government securities reached 41.8% of the total outstanding while the percentage of non-residents’ holdings fell to 22.2% in November, to a gross amount of 84.16 billion lei.   At the same time, pension funds slightly reduced their exposure in December to 25.2 per cent of the total, although net inflows were RON 1.12 billion. Pension funds increased their gross holdings during 2024 from RON 77.98bn at end-2023 to RON 95.53bn at end-2024. The percentage exposure, however, did not change massively, with an exposure of 24.9 per cent of the total outstanding lei securities at end-2023.