A macroeconomic outlook for 2011

Mai 2011

IONUT DUMITRU - Chief Economist / Treasury and Capital Markets NICOLAE COVRIG - Financial Analyst / Treasury and Capital Market RAIFFEISEN BANK S.A.

 

Short overview of past trends…

While in 2008 it was common knowledge that the Romanian economy was vulnerable due to large macroeconomic imbalances (a current account deficit of around 14% of GDP, a high budget deficit, and an overheated economy), the degree of vulnerability was generally underestimated. The recession proved to be deeper and longer than initially expected. Real GDP fell by 7.1% in 2009 and by 1.3% in 2010.

The large decline in real GDP in the last two years suggests that the economy was significantly overheated at the beginning of the crisis and that the rapid growth was highly dependent on inflows of foreign capital attracted by good profit opportunities. When the crisis hit the external markets (end of 2008), inflows of foreign capital dropped off rapidly and risk aversion for the Romanian economy increased due to the major macroeconomic imbalances (large current account deficit and a large budget deficit). With low funds from abroad and faced with weak economic perspectives and relatively high debt servicing payments, households and companies had to adjust consumption and investment substantially. Household expenditures, for example, fell by 11.9% in the last two years. Purchases of durable consumer goods, which usually are financed by loans, fell the most. The number of new passenger cars sold in 2010 was 61% lower compared with 2008. In 2010, retail sales of audiovideo equipment and household appliances were down 37% from the level of 2008 (in real terms). Sales of IT equipment fell by 39% during the same period. During the two years, gross fixed capital formation plunged by 35.1%, with both investment in equipment/machinery and construction works falling sharply.

The government had little room to prop up the economy, due to the pro-cyclical policies pursued before the crisis and the large budget deficit. On the contrary, most of the measures were austerity measures (i.e. a hike in VAT from 19% to 24%, a 25% cut in public wages, a cut in social transfers) aimed at reducing the large budget deficit and improving the sustainability of public finance over the medium and long term. The most important measures were enforced only in July 2010 when it became clear that the fiscal consolidation cannot be achieved without such measures. Although painful over the short term, the measures were aimed at increasing the confidence of foreign investors in the Romanian economy and establishing a foundation for sustainable economic growth in the next period. As stimulus, the government can offer only state guaranties in some areas (i.e. the “First house” programme) and subsidies (i.e. “Rabla” car scrapping programme).

The central bank had also little room to prop up the economy because of the high inflation rate and of high inflationary expectations, and because of the uncertainty in the economy translated in high risk premium for long-term interest rates and yields. Uncertainty in the economy was high over the last two years. Initially (end of 2008-beginning of 2009), there was a lot of uncertainty regarding the capacity of the country to cover the expected external financing gap resulting from the expected drop in inflows of the foreign capitals. In March 2009, Romanian authorities reached an agreement with the International Institutions (the International Monetary Fund (IMF), the European Commission (EC), the World Bank) by which they secured funding of around EUR 20 bn for a 2-year period. This resulted in an improvement of foreign investors' perception for Romania and a decrease in expectations regarding an imminent depreciation of the Leu.

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