Romania monthly economic review - June, 2009

30 Iunie 2009

ERNST & YOUNG S.R.L.

 

Latest developments

Various sources comment on Romania’s GDP contraction for 2009

The International Monetary Fund (IMF) officials, commenting on the Romanian economy, are saying that due to the deeper-than-expected 6.2% y/y contraction inQ1, the most recent official forecasts on the country’s GDP might have been too optimistic. Under the latest projections by the Fund, Romania’s GDP will drop by4.1% this year, and will remain constant in 2010, leading to a rise of 5% y/y growth in 2011. Under this baseline scenario, annualized GDP growth would return to positive territory in Q2 next year. Meanwhile, the World Bank forecasts a 4% contraction in Romania’s gross domestic product this year, followed by a 0.5% GDP growth in 2010, and a 2.5% increase in 2011. In February, the World Bankrevised its estimates for Romania’s economic growth in 2009, from 3.2% to 0%-2%,as prospects for growth in the region continued to deteriorate. As for the country’s current account deficit, it is predicted to be 8.4% of the GDP in 2009, compared with 12.4% of the GDP a year earlier, and is projected to reach 7.5% of the GDP in2010 and 8.7% of the GDP in 2011. Similarly, the European Commission also forecasted a 4% shrinking in 2009 for Romania and for 2010, both the IMF and the EC see a 0% GDP growth. According to the country's Finance Minister, Romania's GDP might contract by 6.5% this year if the economy does not record growth in the following quarters. Romania's GDP shrank by an annual 6.2%, in real terms, in the first quarter of 2009, mainly due to weak agriculture and industry. As a point of comparison, the country's real GDP grew by 8.2% in the first quarter of last year, and expanded by a total of 7.1% in 2008. In the fourth quarter of 2008 the economy cooled off to a real growth of 2.9% y/y. The Advisor to the Governor of the National Bank of Romania (NBR) has also recently stated that the GDP of the country could be significantly lower in second and third quarter of the year, although the predictions don’t include a double-digit decline, with July and August possibly marking the worst point of the recession. The current account deficit may reach 7%of GDP and it might even be possible to steer the deficit to values below this threshold. According to the NBR official, Romania’s budget plan is reliable, functional and together with the rescue plan it could bring the current account gap to 13% by 2013. For the time being, the nation’s average saving rate is around 17% of GDP, but in a sound economy, the measure should be in the range of 24%.

Inflation dropped to 5.95% y/y in May

The inflation rate in Romania was 0.01% in May, compared to April, while the annual rate of inflation dropped to 5.95%. In April, the inflation rate was 0.27%,while the annual rate of inflation was 6.45%. The monthly average inflation rate during the first five months of the year was 0.6%, similar to the figure during the same period in 2008. Compared to May 2008, food items became 4.02% more expensive, the tariffs of the services rose 8.47%, while the prices of commodities other than food rose 6.59%. The average growth of the prices as a whole in the last12 months (June 2008-May 2009) against the previous 12 months (June 2007-May2008), subject to IPC and to the harmonized index of the consumer prices (IAPC), was 7.2%. In the quarterly report from February 2009, the inflation projection for the year was revised by The National Bank of Romania to 4.4%, down by 0.1%, fromthe previous forecast of 4.5%. The inflation projection for 2010 was also revised downwards by 0.4%, from 3.2% to 2.8%.

Industrial production drops by 9.7% y/y in April

Industrial production decreased by 9.7% y/y in April and the negative correction remained in the single-digit area for the second month in a row after the plunge that started last November. Production narrowed by 16.4% y/y in January, by 15.6% y/y in February and by 8.5% y/y in March (13% y/y on average for Q1). It can be concluded that industrial activity slightly improved in March-April, but production still contracted by 9.1% y/y for the period. The core manufacturing sectors have kept performing below average and contracted by 10% y/y in April, which is still a better performance than the 15.2% y/y contraction in Q1. The total factor productivity in the sector however keeps improving, as the value added which was generated in the sector narrowed by only 11.1% y/y in Q1, while industrial production dropped by slightly more, 13% y/y to be precise. This differential has indicated a stable shift towards more value-added production over the past years, stimulated by investments in technology.

FOB-based trade balance narrows by 66% y/y in April

The FOB/FOB trade balance in Romania narrowed by 66% y/y in April, after it contracted by 72% y/y in Q1 on the back of the local currency’s appreciation and the shrinking of external flows that have stimulated imports in the past years. Exports returned to a disappointing negative growth rate (23% y/y in April), after they improved temporarily in March. Imports have maintained a rather stable and substantial contraction rate of nearly 40% y/y in April, after similar dynamics in the whole of Q1. The lower prices of raw materials are partly accountable for the visible narrowing of the foreign trade on both sides, magnifying the drop in exports and imports in terms of volume.

Gross external debt inches up 0.2% m/m to EUR 71.8 bn in April

The country’s gross external debt inched up by 0.2% m/m (or EUR 123 mn) in April, to reach EUR 71.8 bn, after it had dropped by 1.9% ytd (or EUR 1.4 bn) in Q1. Short-term debt has kept narrowing, as it dropped by 2% m/m in April to reach EUR20.1 bn at the end of the month, after having decreased by 7.9% ytd in Q1. On theother hand, medium and long-term debt increased equally in April and Q1. The central bank recently took steps to encourage banks, which are the key intermediaries for foreign loans, to shift from short-term external financing in their portfolios, to longer-term financing by waiving the reserve requirements for the foreign currency liabilities with residual maturity exceeding 2 years.

Finance Ministry expects public debt service to rise by 4.4 times

At the beginning of the year, the Finance Ministry anticipated a three fold rise in government debt, reaching RON 37.8 bn (EUR 8.9bn), excluding the IMF loan. The biggest adjustment, which was by almost RON 20 bn, was for sums expected on the internal market. Since the beginning of the year, the Ministry of Finance has borrowed aggressively from the Romanian market, and at relatively steady costs, in order to cover the needed liquidity, in the wake of adecline in revenues collected by the ministry's budget. In the first four months of theyear, the Ministry borrowed RON 27 bn (EUR 6.3 bn) in government bonds, with overall bonds sold since the beginning of the year amounting to almost RON 40 bn (EUR 9.4 bn). According to ministry estimates, the internal government debt will reach RON 50.7 bn by the end of 2009, while the external debt will total RON 6.6bn.

FDI dropped by 44% in first four months

Romania’s foreign direct investments (FDI) dropped by 44.4% over the first four months of 2009 y/y, decreasing to the level of EUR 2.055 bn, which entirely coversthe current account deficit. The level of FDI has deteriorated sharply from a yearearlier. After the first four months of the year, foreign direct investments in Romania climbed 38.1% only to decline 13.9% at the end of first quarter y/y. In first four months of 2008, foreign direct investments stood at EUR 3.695 bn, which covered only 66% of the current account deficit. In first four months, equity stakes accounted for 51.2% of the total figure, intra-group loans for 40.0% and reinvested earnings for 8.8%. Loans between foreign investors and resident companies have the potential of widening the current account gap, as the money will be eventually repatriated. Romania’s balance of payment gap dropped 78.9% in first four months, falling to EUR 1.18 bn, due to a major contraction of the trade deficit. Last year, foreign direct investments in Romania rose 24.5%, reaching EUR 9.02 bn, covering53.5% of the current account deficit.

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