Romania - retrospective and perspective
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
2010 was the first year of recovery for the world economy after the financial and economic crisis that began in 2007 in the United States.
A series of fiscal stimulus packages helped growth in the advanced economies to improve by 3% in 2010, while the emerging and developing countries have grown faster - by 7.3%, led by developing Asia and Latin America. World output was 5% higher in 2010 versus 2009, driven by accommodative macroeconomic policies.
In such an environment Romania’s economy suffered a contraction of 1.3% in 2010 (after an even deeper contraction of 7.1% in 2009) as fiscal adjustments were made to avoid the possible derails that could have happened due to some extremely loose fiscal policies from previous years. The government had implemented a significant VAT increase (from 19% to 24%), increased local taxes, and cut wages and social benefits. In doing so it has successfully brought down the fiscal deficit to 6.5% of GDP (in line with the IMF agreement) and enhanced the possibility of further adjustment to the deficit in 2011, to 4.4% of GDP. Bearing in mind the adjustments that have to be made by 2012, which include bringing the deficit down to 3% of GDP, the fiscal space for Romania seems limited over the next couple of years.
Romania’s growth has been inhibited by the country’s low European structural funds’ absorption rate. In the four years since 2007, Romania had absorbed just 8.6% of its total allocated funds for the period 2007-2013 (including the up-front payments), with the poorest performance seen in transportation (1%) and the best performance in the regional (15%) and human resources programmes (13%). Legal and political issues have affected the capacity to absorb European funds linked to infrastructure investments – the amount allocated to infrastructure, EUR 4.6 bn, is higher than other programmes – yet Romania’s absorption rate is well behind that of other economies. However, an improvement has taken place in the first five months of 2011, with the absorption rate increasing to 12.4%; during this period Romania received close to EUR 730 mn – around 45% of the funds received in the previous four years (but in all this time the absorption rate in transportation increased to only 2.6%). The contracts’ value with EU financing represents 55% of total EU allocations, which reflects the possibility to absorb money in the future – at least on paper. This is a very important base for future investments in Romania; how quickly the authorities act will determine the pace of economic growth.
Last year the investment component was the looser, the decline of 13%yoy being the sharpest seen among the demand components. In correspondence, on the supply side, the hardest hit was the construction sector, which contracted by 11% yoy (with the residential segment the most affected, followed by non-residential and civil engineering). We see the residential segment continue to improve at a slower rate than other segments, as individuals’ demand (already affected by low incomes and fragile hopes of improvement) might be covered by already existing supply. An improvement might be expected in the real estate transactions on the residential market (with an impact on GDP in the services sector) given the lower house prices and the new first house buyers programme (the eligibility criteria has been extended to include individuals that already own a property that is smaller than 50 square meters; the state guarantee total fund is covering more loans as the state guarantee for each loan has been reduced to half). In the non-residential segment, more projects are reopening or have been initiated, thus a small recovery can be expected. The civil engineering component (linked to infrastructure) remains the potential main driver of growth in the construction/investments area in the medium-term – but again, its success is influenced by the government’s ability to absorb EU funds for infrastructure projects.
While in 2010 household consumption fell by 1.5% (an improvement on the much more debilitating 2009 fall of almost 11%), 2011 might see a relative stagnation or perhaps a small recovery. But the contraction in government consumption is expected to persist. After a very good year for Romanian exports, sustained by rising external demand and an exchange rate that assured price competitiveness, 2011 is expected to face a similar pattern. But with a pickup in investments, imports might grow faster and reduce the gap between the rate of growth of exports and imports.
It is through exports meeting external demand that the industrial sector’ growth has been sustained – a growth rate of 5% was registered last year. Significant growth has also occurred in early 2011, while the capacity utilisation in the manufacturing sector almost reached pre-crisis levels (79% in Q4 2010 vs. 81% in Q1 2008 according to NIS data, though in-house seasonally adjusted). Strong industrial growth is also expected in 2011 but it is important for Romania to increase production capacity in the future to avoid also potential pressure on prices.
We foresee a GDP growth of 1.7% in 2011, the industrial sector still being the main driver as maintaining the perspectives of strong external demand (according to IMF projections, world output will continue to grow by 4.3%-4.5% in 2011-2012). The first quarter already confirmed such a forecast with 1.7% yoy growth driven by 10% yoy growth in industry. It is also true that in Q2 we might see a mild slowdown given the impact of commodity price significant increases in Q1 2011, some impact on industry due to nuclear problem in Japan in Q2, corroborated with the effect of a slowdown expected in world output in the same period. But in second half we expect to see a reacceleration in output annual growth as the commodity prices have stabilised, while a favourable base effect will be exerted given the immediate effect of the restrictive measures taken in July last year that significantly affected the output in the reference period. While investments are expected to pick-up faster next year, we forecast a faster growth in 2012 for Romania (2.8%).
Along with the economic contraction seen last year the unemployment rate has strangely declined from 7.9% (the peak in Q2 2010; s.a. data) to 6.8% by the end of 2010. By the end of May 2011 it went even further down to 5%. In the same time the ILO unemployment (based on survey) has showed unemployment to have stabilised, and not declined. The number of employees continued to decline throughout 2010 (and in the first months of 2011). Therefore the lower registered unemployment rate has not showed new hirings, but the exit of unemployed persons from evidence (without receiving unemployment benefits their incentives to register have fallen). We foresee a stabilisation in the unemployment rate (ILO) or a slight decline at most (from an average of 7.3% in 2010).
One positive issue for Romania is the low current account deficit maintained in 2010. After deficits of 12%-13% of GDP recorded in 2007-2008, a sharp adjustment occurred in 2009 following the contraction in internal demand, with the current account deficit reaching around 4% of GDP in 2009 and remaining at this level. We expect these low levels to persist for two more years, therefore rendering financing needs relatively easy to sustain. Foreign direct or portfolio investments are expected to pick up, particularly when the government begins selling part of its shares in different energy and transportation companies (Petrom, Transelectrica, Transgaz, Romgaz, Tarom, CFR Marfa) – even though domestic interests might be exerted, we consider that non-residents might be the main investors here. Nevertheless these funds will be used to cover the financing needs of the public sector.
For this year the public sector financing needs are around 11-12% of GDP, represented by a fiscal deficit of 4.4% of GDP, T-bills/bonds in lei outstanding at the end of 2010 with maturity in 2011 (RON 30 bn, i.e. 5.3% of GDP) and the Euro denominated T-bill and the club loan expiring in 2011 (both of EUR 1.2 bn, in total 1.8% of GDP). As the Euro-denominated debt has been refinanced in Euro, the remaining financing represents around RON 4.6-4.7 bn per month. In the first six months of 2011 the government raised an average of RON 5 bn per month, which is more than the estimated financing need (the Ministry of Finance has intentionally created a financing buffer). Excess market liquidity has made it easier for the government to access domestic funds.
