Economic overview - August 2011

13 Septembrie 2011

RAIFFEISEN BANK S.A.

 

Highlights

Real GDP grew further in Q2 (+0.2% qoq and +1.4% yoy) but at a slower pace compared with Q1 (+0.5% qoq and +1.7% yoy based on revised data). Lower growth rates were the result of the deterioration in performance of industry (-0.4% qoq) and of exports (-5.7% qoq). Domestic private demand (consumption and investments) remained further weak. Unexpectedly, public consumption grew very rapidly in Q2 (+8.4% qoq).

We think that the expected slowdown in the economic growth on the external markets would have a negative impact on economic growth in Romania as well. As a result, we are lowering the GDP growth expectations for 2012 to 2.7% from 3.5%. We keep unchanged the GDP growth forecast for 2011 (+1.5%) as the better than expected agricultural output would offset for a weaker than initially expected performance for the other sectors (especially industry).

Consumer prices fell faster than expected in July and August (-0.35% mom in each of the two months). The decline in the consumer prices was mainly the result of the plunge in volatile food prices (fruits and vegetables) due to good agricultural output. Helped by a statistical base effect stemming from the hike in VAT to 24% from 19% in July 2010, the annual inflation rate fell to 4.9% yoy in July from 7.9% yoy in June. It stood at 4.3% at the end of August. Short-term inflation outlook has improved as volatile food prices should continue to decrease, keeping the monthly inflation rate at a low level in September. The annual inflation rate would fell below 4% yoy in September. Under these circumstances, we have adjusted downwards the end-2011 inflation forecast to 4.0% yoy from 5.3% yoy previously.

The central bank remained on hold at the last monetary policy meeting on 3 August, keeping the monetary policy rate unchanged at 6.25%. We expect the NBR to remain focused on underlying inflationary pressures rather than reacting to the rapidly declining headline inflation rate. So, we expect the NBR to keep unchanged the key rate at 6.25% at the following monetary policy meetings.

 

Key events of the month

Some positive data on lending

Outstanding loans towards the private sector have already increased for four months in a row (April-July). Moreover, almost all segments (loans in RON and in FCY, and loans to individuals and companies) displayed a positive evolution in recent months. In April-July, outstanding loans in RON advanced by 4%, while outstanding loans in FCY advanced by 4.1% based on euro equivalent.

Loans to companies increased faster than loans to households, while loans in FCY (in euro) advanced faster than loans in RON. Consumer loans performed the worst. While favorable, the positive dynamics of outstanding loans might reflect not only new loans origination but also the impact of other factors: re-purchases of loan portfolios from abroad, refinancing by local subsidiaries of loans initially granted by mother banks, the appreciation of the CHF against the EUR. For the time being, it is impossible to identify which factor is the most important. Our overall assessment is that lending activityremains weak for the time being.

Another favorable review from technical missions from the IMF and the EC

Technical missions from the International Monetary Fund (IMF) and the European Commission (EC) visited Romania from July 20 until August 1 for the regular quarterly review of Romania’s economic program. The review was favorable. The team’s assessment was that performance criteria for end-June 2011 were met and that the program remains on track.

The next review of the program is scheduled for late October/early November 2011.

First budget revision for 2011

At the beginning of August, the Governemnt approved the first budget revision this year. The budget rectification keeps the budget deficit target for 2011 unchanged at RON 23.95 bn or 4.4% of the official GDP projection. The targets for public revenues and expenses were both raised by RON 3 bn. The government said it expects to colect more revenues from VAT and excises.

Fiscal Strategy for 2012-2014 was approved

In August, the governemnt aproved also the Fiscal Strategy for 2012-2014. The Strategy envisages a cut in the budget deficit from 4.4% of GDP in 2011 to 3% of GDP in 2012, to 2.5% of GDP in 2013, and to 2.2% of GDP in 2014. The fiscal consolidation would be achieved mainly on the expenditure side (slow increase in public expenses). The Strategy complies with what Romanian authorities assumed in agreements with the IMF and the EC.

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