Hope for Sunshine After Rain?
Adresa
Bulevardul Iancu de Hunedoara, Nr. 48
011745 Bucureşti, Sector 1
Telefon
+40-21-222.16.00
Fax
+40-21-222.14.01
Website
www.ing.ro
VLAD MUSCALU
Economist
ING BANK N.V. AMSTERDAM - BUCHAREST BRANCH
Although our view about Romania was perceived as too pessimistic back in November 2008 or earlier, it turned out later we were actually realistic. Currently our GDP forecast is seen as too bearish, but we believe consensus will adjust soon.
Global developments along with local ones made us revise our growth outlook from a low of 1.7% to a significant contraction of 3.5%; in addition, we do not see any recovery in 2010. Thus, we expect further deterioration in consumer and business confidence, a more significant impact on the financial sector and about doubling unemployment rate. Nonetheless, even though we admit a more deep recession should not be ruled out, we definitely reject a disaster scenario for Romania.
The NBR remains optimistic and did not react enough to support growth recovery, but we expect this to change quite soon. When it does, RON could weaken additionally and inflation might rise more than in 2008. The central bank is likely to wait the government to tighten fiscal policy before adopting easing measures, but we hope this will happen sooner than later because otherwise growth could suffer even more.
So far, the economic activity moved in line with our expectations and much worse than market consensus. Therefore, given our bleak forecasts, we feel increasingly the need for measures aiming to limit output losses. The authorities could do several things in this regard. We would place first an agreement with the IMF and EU – along with other international institutions –, which is nearer than few months ago. This is not only because it supplies the indispensable money (this has a short-term impact), but rather due to the fact it comes with measures to correct the fiscal gap which was brought to unsustainable levels by the previous government. It is true such measures could additionally damage this year’s growth, but they are unavoidable and prevent output contraction because of financing issues. A delay would only aggravate the situation. Furthermore, since we believe a gradual reduction in the budget deficit might be implemented, the impact on growth should be minimal. Likewise, this would ensure sustainable growth on a medium term and faster recovery than we currently expect conditioned on substantial monetary policy loosening. The latter should be employed quickly once the agreement is in place given lags in monetary policy transmission mechanism. The crisis could be a catalyst for needed fiscal reforms which would work for faster and easier euro adoption. It should also make the government invest heavily in infrastructure.
Looking forward, 2009 is expected to be a recession year (growth estimated at about -3.5%). As the global environment is difficult and domestic demand is expected to remain low, we forecast a gradual recovery of the economy. Economic growth is likely to reach its potential only after 2011, which means a U-shaped adjustment pattern (0% in 2010 and 2.6% in 2011). This is also because growth recovery in Romania depends heavily on growth resumption in the US and Eurozone and improved market sentiment. Appropriate local economic policies are likely to take away part of the pain, but we do not see them as enough to bring strong growth as foreign investment is needed, not just in Romania, but throughout the CEE region.
The euro adoption story not only remains on the cards, but now there are talks of accelerating the process. We view such intentions as favourable for medium- to long-term growth given that they require reforms in different areas (including fiscal), but do not believe 2014 is a viable target.
Romania’s rating
The latest update from a major rating agency took place in November 2008 when Fitch slashed two notches of Romania’s foreign currency long-term rating, bringing it below investment grade. Back then, the latter credit rating agency expressed concerns about “the macroeconomic policy framework in Romania and its ability to avoid a severe economic and financial crisis”. In the opinion of the agency, a much stronger policy adjustment, especially in fiscal policy, is needed to avoid a currency crisis.
Before that, Romania was downgraded by S&P in October 2008 to sub-investment grade as well. Standard and Poor’s Ratings Service stated “the downgrade reflects the mounting risks to Romania’s real economy due to high and rising private sector leverage and the related dependency on an increasingly uncertain external financing channel”.
Both these downgrades should be put into the perspective of October 2008 when the deleveraging was huge and all emerging markets were hit. Back then, some countries were hurt considerably, but Romania managed to escape the tide at the cost of sharp rise in market interest rates (into triple digit territory).
Moody’s is the only major agency to rate Romania investment grade and the latest comments from credit analysts Kennet Orchard suggest an IMF/EU deal would give it the necessary confidence to maintain this rating. However, concerns could arise if the government would have trouble negotiating a deal. He has also praised the current government for “quickly taking steps in the right direction to consolidate fiscally” but expressed worries if the economy would appear unlikely to rebound over the next few years, as “the current context means that the growth model Romania has been relying upon is no longer solid”.
The current rating is at the sub-investment grade level,presented in the following table:
Romania risks another rating downgrade in short term because outlook is negative and all rating agencies warned that fiscal slippage might trigger such a decision in the context of presidential elections this year. However, on the longer term, real convergence process and EU membership should prove a strong anchor for the policymakers and lead to improvements in the Romanian ratings, once the problem with the widening C/A and budget deficit is tackled and euro adoption date approaches.
Political outlook: improved situation
Parliamentary elections took place in Romania in November 2008. After none of the political parties gained clear majority, negotiations finally lead to a surprising left – right (Social Democrat Party (PSD) – Democrat Liberal Party (PD-L)) coalition, with PD-L’s head as Prime Minister and PSD’s leader as president of the Senate. The PD-L’s president, Emil Boc, is a close person of president Traian Basescu.
Although the political arena remains unstable because of misunderstandings in the coalition of politically differently oriented parties and because of divergent views with PSD, the current alliance has a strong majority in the parliament – more than 70%. Therefore, we do not expect the coalition to break up before the November presidential elections, but do not exclude such an event afterwards.
Presidential elections could represent an impediment for measures aiming to correct the budget deficit, yet we hope for bold measures instead of populist ones. For the moment, political factors moved in line with our expectations.
