GARANTI BANK SA

 | 

ROZALIA PAL

  |  26.06.2014

Romania’s path to economic recovery

Moody’s improved the outlook on Romania’s credit rating from negative to stable and has confirmed the lowest level of investment grade of - Baa3, while S&P improved Romania’s long-term foreign currency sovereign debt by one notch to BBB- to investment grade, with stable outlook.

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GARANTI BANK SA



Rozalia Pal

ROZALIA PAL

CHIEF ECONOMIST at GARANTI BANK SA

In March 2014, the structure of the government was changed. Nevertheless, the governing program remained in place.

 

The newly formed Ponta III Government, after the break of the Social-Liberal Union (USL) political alliance, has around 60% support in the Parliament, which reduces the chances of further political turbulences or early parliamentary elections. Still, this year the focus continues to be on the political events related to the EU Parliament elections and referendum on constitutional change to be organized at the end of May, and on the Presidential elections in November 2014.

 

The market was impacted less visibly by the recent political events with no deterioration in the country risk and only a minor volatility of the currency (depreciation of the EUR-RON in Q1 compared to the end- 2013 level reaching a maximum of 1.3% and appreciated back afterwards). This was also due to the fast and relatively smooth change of the government composition. Moreover, after an initial dispute between the President and the Prime Minister, the IMF letter of intent was signed and sent for approval to the IMF Board, confirming the assistance of international lenders in the country’s structural reforms.

 

The strongest contributor to the GDP growth in 2013 was the industrial sector, coming exclusively from export-oriented segments. Despite the expected deceleration, the industrial output will likely remain the strongest contributor to GDP in 2014.  We expect the construction segment to turn slightly positive, benefiting from the support provided by the increased absorption  of EU funds for infrastructure. The trade segment should also bring a slight positive contribution in 2014, since the purchasing power of the population is stimulated by the low inflation. Overall, we expect a recovery of domestic demand, resulting in GDP growth of around 2.9% yoy.

  

 

The growth should be stimulated by the low interest rate environment. The NBR key rate reached 3.5% in early 2014 and is expected to stay at this level until the end of the year. Further monetary easing might be implemented through release of  liquidity from minimum reserve requirements with one more cut of its rate after the reduction in January 2014.

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