Outlook: Rising Economic Disequilibria Require a Tight Macro Policy Mix
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Septembrie 2008 |
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UNICREDIT TIRIAC BANK S.A. |
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Strada Gheţarilor, Nr. 23-25
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Romanian economy continues to show good resilience to the new deteriorated international environment supported by still lively consumption and buyoant investment activity especially in the construction sector. Decelerating effects of higher cost of capital channeled through external financing and dragging anchor of tightening monetary conditions are expected to materialise not before the last quarter of this year. The capital market sell-offs and long-lasting currency weakness continues to witness that uncertainty among investors is still high. Under these circumstances, a balanced macro policy mix remains crucial in order to support smooth reduction of current macroeconomic disequilibria.
Romanian GDP expanded by a real 8.2% yoy in Q1 2008 above market consensus. Despite some cooling in the pace of economic expansion is expected in H2, we reckon the large agricultural harvest anticiapted for this year will contribute to prop up growth to 6.8% compared to 6.0% in 2007.
Inflation is climbing towards a new three-years peak of 9.5%, to be reached in July. Although we expect CB to keep rates on hold at 10% till the end of the year, other monetary instruments may be used to fight against inflation. Lower base effect will also give a helping hand supporting some softening in CPI inflation up to 6.8% in the year-end.
Some tempering of pressures on the external gap seems to have materialised in the first 4 months of 2008 with export growth path outperforming the dynamic in imports. Despite the observed moderation, Romanian current account deficit is expected to stay high through the rest of the year resulting in a full year gap of 14.2% of GDP.
Some signs of increasing uncertainty
The turmoil period has hit Romanian equities and credit spreads, aggravated also by long-lasting depreciation since August 2007. The BET index shrank around 40% since the beginning of last year financial turbulences, while the RON depreciated by 16%.
Looking at the overall Romanian financial market, the strong decline of the narrow Romanian capital market (27% of GDP at the end of 2007) is likely to be more than counterbalanced by the upsurge of credit market by 62% yoy in April 2008 (banking system total assets representing 64% of GDP at the end of 2007) that proved to be less sensitive in the first four months of the year to the increasing interest rates.
Still, the capital market sell-offs and long-lasting depreciation of the local currency is signalling the increasing nervousness and deteriorated investor sentiment on Romania. Under these circumstances, unrestrained credit growth and consumption driven economic boom are just underlining the fear of an economic overheating. Consequently, thoughtful reaction must be a priority in order to place the economic development on a sound footing and reinforced certainty of the economic outlook. Prompt measures are expected regarding the government’s economic policy reorientation towards structural reforms and long-term investment projects that became crucial in regaining the attractiveness of the Romanian economy. An urged need is expected for balanced monetary and fiscal stimulus in fighting against imbalances. Romanian economy has inherent strengths but now is the government’s turn to step up efforts to regain the positive market sentiment through pro-business long-term commitments.
