Romania: Time to Deliver on Commitments
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Noiembrie 2010 |
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LUCIAN ANGHEL - Chief Economist
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
Summary
The public sector in Romania needs tough reforms, which have been delayed for too long; even though 2010 is to be sacrificed from an economic recovery standpoint, Romania will be able to exit recession more consolidated and ready to return to a long-term growth path in a more sustainable way.
Although the outlook for 2010 remains subdued, GDP produced a positive surprise, advancing by 0.3% q/q in 2Q10; industry helped by exports as well as the temporary rebound in retail sales and strong figures seen in household services, which signaled a stronger consumption compared to previous quarters, were the main GDP drivers in 2Q10.
Construction reduced its fall in June, on favorable monthly trends across all three segments: residential, non-residential and engineering; however, local managers see a moderate decline in construction over the next three months.
The lower registered unemployment rate in 2Q should be linked to the seasonal profile of some activities, such as construction, agriculture, hotels and restaurants; we expect registered unemployment to rise to more than 9% at the end of 2010 if the government presses on with the reform of the public sector, which entails around 60 tsd job losses by January 1st, 2011.
Inflation in July came in at 2.6 m/m, below market expectations, while in annual terms CPI accelerated to 7.2% from 4.4% June; the incomplete pass-through of the VAT hike (+5pp to 24% beginning with July) on the consumer prices was mainly caused by a sluggish household consumption which counteracted the sudden change in taxation.
GDP positively surprised in 2Q10, but the economic outlook remains subdued
According to latest information released by NIS, real GDP increased by 0.3% q/q (s.a. data) in 2Q10. The annual growth rate remained negative at -0.5% y/y. Although no further details have been released, real GDP was probably helped again by high exports to Euro Zone countries. Besides the support of the external demand, retail sales entered the positive territory in annual terms in June for the first time since the onset of the economic recession in 4Q08. As a result, the support offered by households' consumption to real GDP was probably stronger as compared to the previous quarters. Government consumption remained depressed due to the ambitious fiscal consolidation program followed under the stand-by arrangement with the IMF.
Real GDP could enter again negative territory in 3Q10 due to the strong cuts in public expenditures and the recent hike in VAT. However, the austerity measures are likely to be absorbed rather quick by the Romanian economy and we expect a slow and constant upward trend in q/q terms beginning with 4Q10. Although uncertainties are still high and this makes us maintain our forecast of -3% for 2010, we acknowledge that the probability of a slightly better performance of the Romanian economy has increased.
Getting out of recession is no easy task, especially for a country that can only partially rely on the export rebound and that still has a high consumption profile fuelled by loans until recently. To stimulate growth with an unrestructured public sector would not be desirable and the recent experience of other countries in the region teaches us that overlooking problems means cumulating negative effects much more difficult to handle later on.
The expansion of the fiscal deficit in Romania became an issue as of 4Q08, while the two consecutive election years and the strong pro-cyclical fiscal policy until end-2008 took a heavy toll on the structure of public expenditures. This is all the more important now, in recession, since the rebound of investments in the local economy is highly dependent on FDIs, which remained low in 1Q10, despite the opportunities offered by the seventh largest country in the EU. Sovereign debt issues that emerged pretty recently in the region and fears of a possible ripple effect are likely to discourage foreign investors from 'priming the pump', with direct consequences on the economic recovery. Meanwhile, the government should struggle to restructure the public expenditures considering they don't have much lee-way in sustaining CAPEX.
External new orders came in thick and fast
Industry continued to advance, mainly on the back of external demand, while the domestic counterpart showed signs of invigoration. The range of industry benefiting from higher external new orders widened to include metallurgy and chemical products, while automotive maintained a high profile in terms of external ROdemand. Some industries, such as pharma, IT electronics and optics remained in negative territory, despite buoyant external demand, as they rely more on the local market.
Capital goods continued to be atop foreign customers' preferences, while intermediary goods shifted to the positive zone, helped by higher production in the chemical industry. It is important to mention that, without help from FDIs (the automotive industry is a typical example here), industrial production would have probably been much lower. Economic sentiment in industry continued to recover more visibly in the Eurozone in 1Q and the trend held in the following three months.
