Romania – Under spell of correction
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24 August 2009 |
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BANCA COMERCIALĂ ROMÂNĂ S.A. |
Adresa
Bulevardul Regina Elisabeta, Nr. 5
Bucureşti, Sector 3
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+40-21-310.02.46
+40-21-311.18.19
Website
www.bcr.ro
Macroeconomy Digest - Quarterly
- Deeper economic contraction in 2009
- Impressive improvement in external imbalance
- Disinflation allows further monetary easing
- Budget deficit revised upwards for end-2009
Summary:
- The Romanian economy is falling behind its CEE peers, amid stronger contraction in domestic demand; real GDP fell at an estimated 7.6% y/y in 1H09 and the latest macro trends suggest a deeper fall in 3Q09, due to a strong base effect
- A return to economic growth is possible in 2010, if the economic rebound continues in the Eurozone and the US; resumption of economic growth in Romania is more likely to be gradual, below-potential in the coming years
- Rethinking Romania's economic growth model after the end of thepresent economic recession is crucial for securing a successful catch-up strategy on the way towards the Eurozone; new economic areas that might generate sustainable economic growth in the future include infrastructure, energy and agriculture
- The impressive improvement in the external balance mirrors the strong adjustment of aggregate demand; the C/A deficit is expected to halve at least this year (5% of GDP at the end of 2009, vs. 12% in 2008); in the first half of this year, the deficit was fully covered by FDI inflow
- Disinflation to continue in 2H09, while monetary policy could relaxfurther; market rigidities in establishing prices are still present; this has put a brake on the deceleration of CPI so far
- Romania is allowed to run a higher budget deficit in 2009; further cuts in wages are expected in 2009 and 2010, with significantly higher unemployment in the public sector, especially next year; part of the budget funding needs in 2H will be directly covered by the IMF
- Any increase in the taxation level before the end of the economic crisis and prior to structural reform of public expenditures could preserve inefficiencies and cause adverse effects on the economy
Deeper fall than CEE peers’ in 2Q09
After an exceptional 2008, during which Romania grew by a staggering 7.1%, the ripple effects of the recession in the Eurozone began to be felt increasingly strongly - especially from 2Q09. Despite the progress made in the last few years, the restructuring process of the real economy is far from complete. With local demand crushed by much scarcer liquidities than had been coming from abroad in the last few years and increased caution among both lenders and borrowers, Romania's economy is likely to contract more in 2009 than anyone had expected. The specter of dwindling income and higher unemployment is certainly a deterrent, while confidence indicators point to stabilization at low levels, at least in the short run.
Romania’s economic expansion almost 3.5 times faster than Eurozone in last five years
Romania had become an investment-driven economy, considering the strong investment rates in recent years, greatly underpinned by external resources, which played an increasing role in driving the economy upward at overheating rates. The local economy grew 3.5 times faster than the Eurozone average in the last five years, while hefty FDI inflows proved very useful in paving the way to a more efficient and flexible economy - able to respond better to both domestic and foreign demand.
Economic expansion was also largely sustained by too vigorous consumption, boosted by fast income growth rates and a wide range ofloan-based products, amid tightening competition in the banking market. The real economy could hardly keep up the pace, with the local banking sector dominated by major foreign banks. Meanwhile, there has been a clear discrepancy between the "ready to lend" approach of banks - before the start of the crisis - and the limited absorption capacity of the Romanian economy, which has also been reflected by the very low EU fund absorption rate.
Romania is currently falling faster than its CEE peers on an annual basis (albeit not as badly as in the Baltics and Ukraine), under the strong downward correction of its sizable current account deficit and much lower domestic demand, while lending has lost considerable momentum, despite monetary policy relaxation.
Comparative economic growth across CEE countries and Eurozone
