Additional public resources injected by the government into the economy, a normal agricultural crop after the severe drought of last year and a minor recovery in external demand will lift real GDP growth to 1.1%.
Investor confidence improved worldwide at the beginning of 2013 due to the ample liquidity provided by major central banks to the markets in 2012 and a last-gasp resolution to the US fiscal cliff problem. The decisions by Barclays and JP Morgan to include Romanian local currency bonds in their emerging market indexes gave a boost to Romanian assets. The RON strengthened to a one-year high of 4.32, CDS spreads fell to below 200bp for the first time since March 2010 and 5Y government bond yields fell 80bp in less than one month.
Household consumption to support economic growth in 2013
Real GDP could go up by 1.1% in 2013, after 0.3% last year.
The early implementation of tough austerity measures in 2010 put Romania’s public finances on a more sustainable path and created fiscal space for increases in public wages and pensions. Public wages were raised by 8% in July 2012 and 7.4% in December 2012, while pensions increased by 4% in January 2013. Moreover, the government will continue to make payments (estimated at RON 640mn in 2013) to public employees following definitive court decisions in 2011. Consumer confidence improved in December for the third month in a row and created favorable conditions for retail sales and services to the population in the first part of 2013.
The 2013 state budget is a pro-growth budget and we think that household consumption will be boosted by official policies. The government’s road infrastructure plans are highly dependent on rapid improvement in the absorption of EU structural and cohesion funds and also on the development of PPP projects for building highways across the Carpathian Mountains. Big infrastructure projects in agriculture, such as the Siret-Baragan irrigation channel, should be preceded by passing a law to stimulate the merger of small agricultural plots into large farms. An increase in productivity in agriculture and better orientation towards consumer markets will strengthen the financial position of Romanian farmers and will enable them to support the irrigation costs. The government could consider various options for stimulating the merger of small agricultural plots, such as subsidizing the administrative expenditures made by poor peasants when selling their farms (land tenure, legal expenditures).
According to our model, potential GDP fell to 1.3% at present, from as high as 4.8% in 2004. Almost 90% thereof can be ascribed to falling investments up to 2010. Since a significant increase in investments, either public or private, is not our baseline scenario and employment will not be very supportive for future growth, we think that only a rise in total factor productivity could lift potential GDP to 3-4% after 2015. A diversification of economic growth drivers and an increase in competitiveness will improve Romania’s resilience in the face of external shocks. Economic sectors, such as agriculture, transport and tourism, which were slow in attracting foreign direct investments in recent years, have the highest potential for an improvement in total factor productivity. Privatization remains a real option in transport in 2013.