Romania: Economic outlook 2011-2015
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August 2011 |
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JOAN HOEY - Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT |
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JOAN HOEY
Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT
The Economist Intelligence Unit forecasts that economic growth will return in 2011, reaching 1.5%, and that annual growth will average 4.7% in 2013-15, after picking up to 3.7% in 2012.
Policy trends
The IMF reached an agreement at staff level on the first review of the 24-month precautionary stand-by arrangement, worth SDR3.1bn (USD 4.5 bn), in May. The arrangement will run in conjunction with precautionary support from the EU of EUR 1.4 bn (USD 1.9 bn), and a loan from the World Bank of EUR 400 mn (USD 500 mn). It will concentrate on policies that promote growth and employment, while continuing with medium-term fiscal consolidation. The main challenge will be to reform the debt-ridden public sector, with the emphasis on capping and reducing the arrears of the largest stateowned enterprises ahead of privatisation or liquidation, and restructuring the state-owned transport and energy enterprises, as a precursor to privatisation. The proposals are radical by Romanian standards and are expected to encounter public and parliamentary opposition.
The government also proposes to sell much of its remaining minority holdings in partially-privatised companies and utilities. The sale of a 9.84% stake in OMV Petrom, an oil firm, is expected to be completed in 2011, in order to finance infrastructure investment. However, the decision in May by a Greek group, OTE, to drop plans to buy a 46% share of Romtelecom, the country’s largest telecommunications firm, was a setback for the government, which may now list Romtelecom shares on the Bucharest Stock Exchange (BSE).
There will also be a concerted effort to improve the absorption of EU funds; the proposed territorial reforms are ostensibly intended to assist in the development of cross-county proposals for EU funding to improve infrastructure. Other priorities include cutting bureaucracy and red tape, developing the regulatory environment, and improving business conditions for domestic and foreign investors.
If a Social Liberal Union (USL) – comprising the Social Democratic Party (SDP), and the Centre-Right Alliance (ACD) of the National Liberal Party (NLP) and the Conservative Party (CP) – government took power after the 2012 election, the Economist Intelligence Unit expects that it would try to negotiate larger budget deficits with the IMF, and might try to secure credits from China and Russia, so as to reduce its dependence on the IMF. Although the flat-rate income tax would probably be preserved, a USL government would support a reduction in value-added tax (VAT).
Fiscal policy
The consolidated budget deficit fell to the equivalent of 1.36% of forecast annual GDP in the first five months of 2011, mainly as a result of cuts in publicsector wages and in capital expenditure, as well as increased revenue from VAT and excise duties. The government plans to reduce the consolidated budget deficit to 3% in 2012, 2.4% in 2013 and 1.9% in 2014, largely by cutting the public-sector wage bill, from the equivalent of 8.3% of GDP in 2010 to 6.4% in 2014. The government will also take steps to improve revenue collection, widen the tax base and improve the absorption of EU funds. We expect the consolidated budget to record deficits that slightly exceed these targets in 2011-13, but, barring a collapse in policy, we forecast that the deficit will shrink to 2% of GDP by 2015. A longer-term concern is that the recession in 2009-10 drove employees out of the formal economy and into the grey economy and family employment, where tax collection is low – a trend that may be hard to reverse as the economy recovers.
Monetary policy
The National Bank of Romania (NBR, the central bank) operates an inflation-targeting regime with a year-end target of 3% (±1 percentage point) for 2011 and 2012. It has established targets of 2.5% (±1 percentage point) for 2013 onwards. The NBR expects year-end inflation to fall from 8% in 2010 to 5.1% in 2011, dropping to 3.6% in 2012, provided that fiscal consolidation continues and that world food and oil prices are contained. Consequently, we do not expect further reductions in interest rates in the short term. The NBR reduced its monetary policy rate by 175 basis points in January-May 2010, to 6.25%, but has since left the rate unchanged because of concerns about inflation. The NBR is unlikely to announce further cuts in interest rates until the rate of inflation is brought under control. However, we expect the NBR to relax its monetary policy in 2012-15, as inflation falls.
NBR vice-governor Christian Popa has argued that the Leu is not over-valued, despite calls from the business community that an exchange rate closer to RON 4.7-4.8 : EUR 1 would represent a “more normal” rate which would stimulate exports. Mr. Popa indicated that the NBR was not involved in determining the level of the exchange rate per se, which would be established by the market, but was concerned with avoiding excessive exchange rate volatility.
The government has indicated that it will keep 2015 as its target date for adoption of the Euro, but it appears increasingly unlikely that Romania will meet the convergence criteria of the European Central Bank (ECB, the Euro area’s central bank) in time. Further, the NBR may wish to maintain the flexibility of a floating exchange rate until at least 2016-17.
Economic growth
Romania was one of the last EU economies to enter recession, with quarter-on-quarter growth turning negative only in the third quarter of 2008. It was also one of the last EU economies to exit recession, with seasonally adjusted real GDP growing by 0.7% quarter on quarter in January-March 2011, following growth of 0.1% quarter on quarter in October-December 2010.
