2009 - A Challenging Year for Romania
Adresa
Bulevardul Barbu Vacarescu, Nr. 301-311
Cladirea Lakeview, Etaj 3
020276 Bucureşti, Sector 2
Telefon
+40-21-202.04.00
Fax
+40-21-319.11.69
Website
www.rbs.ro
According to the IMF, recessions sparked by a financial crisis are two to three times deeper and up to four times longer than a recession that is part of an economic cycle. But it is also known that the more coordinated measures from governments, central banks, supranational institutions are taken, the more the effects of the crisis can be diminished. Interventionism, although criticised in theory and in normal conditions, is an acceptably important issue in the current context, and may affect the fiscal burden in future years.
The main features of Romania’s business environment in 2009 are expected to be:
- No easy access to financing (high costs, lower funds availability)
- Need for additional equity
And therefore the debt/equity ratio is expected to diminish:
- Current loans restructuring will be needed
- M&A market might increase as there will be opportunities for companies with strong positions and cash rich to buy distressed companies, or for players to consolidate their position by mergers
- Bankruptcies will strongly increase especially in sectors that experienced rapid expansion (such as constructions)
- Need for more structured business plans, new strategies, and new business models. Romanian managers/companies have experienced organic growth in activity in the last eight years, but conditions are changing fast and require immediate adapting measures.
- Increasing unemployment and implicitly significantly lower pressures on wages
- Lower prices for raw materials that will diminish costs
- High volatility of the exchange rate; by hedging financial losses would be limited
Romania’s GDP growth in 2008 of 7.1% was the best performance in the region (next highest was Slovakia, with 6.4%). The rise in output growth (from 6.2% in 2007) was due mainly to a huge favourable base effect from agriculture and net taxes (as disrupting factors influenced these sectors in 2007 and the comparable base for 2008 became lower than normal). If we were to adjust the GDP figure with these two sectors we obtain an output growth figure for 2007 of 9.6%, and only 5.8% for 2008. Although the construction sector remained a strong contributor to growth in 2008, from the second half of the year the dynamics in construction started to decelerate; similar, yet deeper trends were seen also in industry and services. The effects of the global economic crisis on the Romanian economy began to be felt in the second half of 2008, accentuating even more than expected in the last quarter.
Our forecast base scenario assumes a 0% GDP growth for 2009 and a recovery of no more than 2% in 2010. For the current year we assume positive, but very low growth in agriculture (in 2008 output in this sector was larger than in any other year except the record high in 2004). Because Romania’s rural sector is weather-dependent any estimate is difficult. Any negative growth (when it has occurred in the past it has been significant) will impact the GDP growth figure that is already “neutral”. Many markets – including real estate, credit, and automotive – are currently more or less “frozen” and if appropriate measures from the new government and from the central bank will not take place as soon as possible, our GDP scenario might appear overly optimistic. Uncertainty is extremely high, and the impact of the global economic crisis on Romania’s economy is difficult to estimate. Therefore the downside risks for the base scenario are larger than the upside risks as the economic performance and expectations for the big players in the world economy are worsening with each news release. As Romania’s growth of the last several years was based on significant foreign capital inflows that fuelled a big boost in consumption and real estate, a reverse of the trend could be worse than expected.
We consider that industry, which is highly exposed to constantly diminishing external demand, will be a sector that might suffer a contraction (in Q4 2008 the industrial output was already 7.7% lower than one year ago). On the other hand, the construction sector, which has grown by 25-35% in the last two years, is expected to slow significantly (in Q4 2008 the annual growth rate was already 18.9%, 10 pp lower than Q3 figure). Our base scenario involves a growth rate of 2-3% at the most for construction in 2009, the lowest rate in the last decade. Why do we consider that there might be positive growth? An important issue is the split of the construction sector in terms of new orders: 60% civil engineering (including roads, railways, bridges, airports, stadiums), 25% non-residential buildings (including factories, warehouses, shops, cinemas, offices, and administrative spaces), and 15% residential buildings (including homes, nursing homes, orphanages, and hostels); (this split is for the January-September 2008 period, with similar ratios seen in 2007, although the residential market gained additional share). As we expect the most affected segment to be residential, it is also an advantage for the economy as the respective segment has the lowest weight. Local banks will be reluctant to finance further residential projects, but may show more flexibility towards industrial and offices projects. High potential will be in the civil engineering segment, where a strong presence of the government is needed. EU funds and more public-private projects are some key points from which Romania can benefit. Discouraging are the figures reported by the Ministry of Finance that shows that the European funds absorbed by the government during 2008 were 11% lower than in 2007 and almost four times lower than the budget projections at that time. The attitude of the new government towards cutting the current administrative expenditures and reorientation towards investments is encouraging.
As for services – the sector with 50% weight in GDP that has increased by 7-9% in the last five years – we also expect a significant slowdown, with financial intermediation and the real estate segments the most affected. New credit is expected to be lower than in 2008 as the policies of banks will become more prudent; the cost of financing will be high while the availability of funds for lending has already diminished and it is not expected to improve soon. We expect the central bank to gradually decrease the key rate during 2009 to 8.5%, which will release some pressure for credit activity. Although, concerns over RON depreciation will keep the NBR protective with the minimum reserve requirement ratios, as RON liquidity released into the system will create additional pressure on EUR-RON, while reducing fx reserves will increase the vulnerability of indices related to the exchange rate, weakening the central bank’s power to defend the RON.
Real estate market transactions faced a sharp decline in the last quarter of 2008, and the prices for some segments decreased, especially for land and residential buildings. But on the other hand, new opportunities appear in the market given the lower priced assets and costs that might attract new comers that have stood aside up to now.
Current account
Given the significant slowdown on consumption and investments, the current account deficit is expected to decline relative to GDP. While for 2008 the gap was 12.3% of GDP (down from 13.5% in 2007), for 2009 the gap might reach 8.7% (with downside risks if the economy will contract). In 2008 the current account deficit reached EUR 16.9 bn, only 1.2% higher than in 2007; the significant slowdown compared to 2007 (+64%) influenced by the decline in growth of the trade deficit from 52% in 2007 to 2.1% in 2008 and by the significant improvement in services and current transfers surpluses. In the case of current transfers balance the decline in private transfers (associated to remittances) was more than compensated by the increase in government transfers (most probably EU funds). On the other hand, the accelerating income deficit pressured the current account deficit in 2008, which partly reflected the increase in foreign direct investments profit reinvested from foreign companies being included in the income deficit). FDI was EUR 9 bn in 2008, 24% higher than in 2007, and covered 53% of the current account deficit (a better coverage ratio than the 44% coverage in 2007). The bottom line is that the improvement in Romania’s external disequilibrium has come from a weaker RON – which depreciated by almost 10% against the EUR in 2008 – and more restrictive monetary and credit conditions (higher interest rates and more restrictive retail credit regulation) that has slowed down spending on consumption.
Besides the risks of contraction in consumption and investments in 2009, a weaker RON will be an additional factor in reducing the current account gap. For exports, falling external demand will be negative but will be counteracted by the weaker RON (although the net result is expected to be negative for exports); imports will be less as internal demand and a weaker RON will exert only negative effects (moreover, the elasticity of imports to exchange rate changes is larger than that of exports, reacting in a more profound way). Our CA deficit assumptions are based on larger outflows representing profit repatriation, while on current transfers falling remittances are expected to be counterbalanced by EU funds.
