Weekly Financial Focus - February 17
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17 Februarie 2012 |
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BANCA COMERCIALĂ ROMÂNĂ S.A. |
Adresa
Bulevardul Regina Elisabeta, Nr. 5
Bucureşti, Sector 3
Telefon
+40-21-314.91.90
+40-21-312.61.85
Fax
+40-21-310.02.46
+40-21-311.18.19
Website
www.bcr.ro
Macro and real economy – highlights
Romania grew 2.5% in 2011
According to the GDP flash estimate released on Wednesday by the National Institute of Statistics (NIS), the Romanian economy advanced by 1.9% y/y in 4Q11 and 2.5% for the whole year. As this is just a flash estimate and no further details were provided by the NIS, we will make several comments on overall GDP development in 2011, based on the trends shown by a set of key leading indicators and other signals we have picked up from the real economy.
Undoubtedly, industry and agriculture were the ‘flavor of the year’, delivering more than 90% of total economic growth in 2011. All in all, external demand was supportive throughout 2011, helping nominal exports go up by a robust 21% y/y. However, industry lost significant momentum in 4Q11, when confidence in the Eurozone began to buckle, which may have triggered a rundown of inventories, with negative impact on GDP formation.
The superb agricultural year gave a leg up to private consumption in the last two quarters of the year, by means of increased cottage food industry largely destined for the own use of households in rural areas. The rebound of private consumption was further supported by the favorable trends in retail sales y/y, which poked into positive territory in 4Q11 for the first time in the last twelve quarters. Although slowing down y/y in 4Q11, we expect gross fixed capital formation to have made a positive contribution to overall GDP growth in 2011. A favorable base effect is likely to have helped capital investments stay above zero in 4Q11.
We expect the economy to ease to 1.2% in 2012, but a lot depends on trends in the Eurozone, the main trading partner of Romania, accounting for around 55% of total exports. Although economic sentiment in the Eurozone seems to have stabilized at low levels (well above the level seen during the economic crisis two years ago) we have to acknowledge the growth risks for Romania are mostly biased to the downside. Against a European backdrop riven with uncertainties and struggling to overcome the sovereign debt crisis (Moody’s has just downgraded several European countries), improving the absorption of EU funds (to complement thin FDI inflows) is crucial to keeping the local economy afloat.
With a fiscal consolidation process only partway completed, a hasty and baseless decision to hike public wages and pensions in an election year is not at all advisable for Romania. The budget deficit target for 2012 is set at 3% of GDP (ESA) and all eyes will be riveted on the achievement of this ambitious objective.
Inflation at new historic low in January
Inflation surprised to the downside in January, while the market consensus and our expectations were above the actual number (0.4% m/m), which helped inflation ebb to a new record low in the last twenty years (2.7% y/y). One of the main factors that put our estimate out by +0.3pp was the fuel price, which strangely rose by only 1.2% on average, when actual readings at petrol filling stations showed prices firming up by almost 3% on average. The impact of the significantly lower fuel price was significant as the share of this product category stands at an impressive 8% of the total CPI basket in Romania. There was another false alarm, announced even by the National Authority for Energy Regulation, in January about an alleged hike in the electricity price (by 2.5%). This never materialized, or at least the increase was not included in the energy price change in January by the National Institute of Statistics.
The price of all other items was pretty much in line with our expectations. Again, vegetables and fruit on the food products side saw the highest rates of increase (1% and 0.9%), while tobacco products sped to a monthly 1.2%. The price of services strengthened by 0.4%, while water and sewerage services still marked a striking contrast, growing much more rapidly than most prices and well above service prices (1% m/m). Unadjusted core inflation (CPI less volatile and administered prices) edged down to 2.7% from 2.8% in December last, and there are increased chances of Core 2 bottoming out soon.
Considering the latest inflation number, we have revised down the 2012 inflation forecast to 3.7% from a previous 4.1%, but maintain that the favorable base effect will be the main driver for disinflation in 1H12. As the base effect will wear off in the second half of the year, with an agricultural crop that will be far from a match for the one-off plentiful harvest seen in 2011, inflation pressures are likely to rebound as of next June. Although we see the 5.5% level of the key rate as adequate, considering both external and domestic factors, we cannot rule out a further cut in the key rate, to 5.25% in 1H12
In a recent interview, the chief IMF/EU review mission for Romania did not seem too convinced about the downtrend of inflation and called for prudence over further monetary policy easing. He explained that monetary policy relaxation has already fed through to interest rates for the private sector, which began to decline.
