Romania - Macroeconomic Outlook
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Martie 2008 |
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UNICREDIT TIRIAC BANK |
Adresa
Strada Gheţarilor, Nr. 23-25
014106 Bucureşti, Sector 1
Telefon
+40-21-200.20.00
Fax
+40-21-200.20.02
Website
www.unicredittiriac.ro
Outlook
2007 turned out to be another year of robust growth despite the drought affecting the agricultural sector, with real GDP anticipated to have surged by 5.7% for the full-year in line with Q3 performance. The solid growth momentum of investment activity backed by EU funded projects and still fast consumption growth will continue to support a good performance of the economy also this year with GDP growth projected at 5.4%.
Inflation accelerated to 6.6% at the end of 2007 above the CB target band mainly on the back of fast rising volatile food prices. The record low inflation posted in the first 7M of 2007 will result in higher base effect this year, boosting inflation towards 8% in Q1 2008. We reckon disinflation process to regain pace in H2, pointing to a year-end inflation of 5.8% supported by further tightening in the monetary policy (by an overall 50bps).
The external gap continued to widen throughout 2007 and is expected to have topped at 14.5% of GDP. Still high consumption and investment demand-driven imports and weak export performance will exert further pressures on CA deficit forecasted to reach 14.8% of GDP at the end of 2008
Economic growth still buoyant
Romanian real GDP growth accelerated to 5.7% yoy in Q3 from 5.6% yoy in Q2 in line with our expectations, spurred by strong construction activity (37.4% yoy), which more than offset the damage to the drought-stricken agricultural sector (-23.8%). Private consumption remains robust, up by 8.2% yoy, posting only a moderate slowdown compared to the 10.7% observed in Q2. The fast pace of households’ consumption continued to be fuelled by improving labour market conditions supported by the strong dynamic of wages and easier availability of credit, which expanded by over 80% yoy for the third year in a row. Growth was also backed by the sharp rise in investment activity, which besides the construction oriented investments (39.3%), benefited from fast expanding investments in capital goods (up by 26.6% yoy). On the negative side, net exports deteriorated strongly, on the back of 22.4% yoy increase in imports and still weak export performance increasing by a modest 1.7% yoy in Q3. Overall, the most recent trends provide evidence 2007 was another year of strong growth with real GDP expected to have increased by around 5.7% for the full year, taking also into account the marginal slowdown anticipated in the last quarter, mainly due to lowering consumption growth.
Despite the good economic performance and still positive growth prospects, rising vulnerabilities have become more and more visible in the recent months. On November 5th, Standard & Poor’s downgraded Romania’s rating prospects to ‘negative’ from ‘stable’ reflecting the difficulties faced by the governmental policies to answer foreign trade imbalances linked to worsening financing conditions at the international level. This move has been followed very recently by Fitch’s, which also revised the outlook to negative citing the heightened downside risk of an abrupt slowdown in capital inflows.
Given the current phase of nervousness of international investors, any further deterioration on the intrinsic country risk might trigger strong negative reactions. Therefore, a proper mix of macroeconomic policies becomes absolutely crucial to restore the recently harmed investors’ confidence on the Romanian economy.
