Emerging Romania Going Forward
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
An outstanding economic performance in 2008 with fewer overheating pressures than 2007
A real GDP growth rate of around 8% yoy made Romania’s economy the strongest of all EU economies during the first half of 2008, with the possible exception of Slovakia. The sharp rise in economic activity during 2008 (from 6% in 2007) has been founded primarily in a rise in agricultural output after last year’s disastrous harvest and a recovery in net taxes due to a favourable base effect. In 2007 net taxes faced significant losses upon EU entry (by the reduction of customs duties) and a government decision not to collect VAT on EU imports at customs points in the first four months of 2007 – a decision that was later reconsidered, but nevertheless the harm had already been done. Romania’s industrial sector has performed slightly better than last year, keeping beyond 5% growth, while the construction sector, with a growth rate of higher than 30%, continued on its similar explosive growth path from 2007. By excluding agriculture and net taxes from GDP (components that have induced the highest volatility based on certain shocks) business activity has decelerated compared to previous quarters, although it has maintained its growth rate beyond potential output growth.
For 2008 we estimate economic growth will be above 7.5%; even though it will be higher than in 2007, we do not consider that the economy will show the same overheating signs that surfaced last year. This is due to a change in the structure of growth: consumption and investments may still continue to grow with high rates but not any more accompanied by trade deficit growth acceleration. Households’ consumption dynamics might be high, but the difference is that will be driven by an acceleration in self-consumption growth – driven by good agricultural output, while the retail sales figures are already signaling that a downward trend in goods acquisitions’ growth could lie ahead.
For 2009 GDP growth is expected to slow to around 5.5% as the National Bank of Romania’s monetary tightening measures taken in 2008 begin to exert their effects.
Has Romania’s external disequilibria turned the corner?
After reaching 14% in GDP last year, the current account deficit stabilised at this level in the first half of 2008. The main contribution to this welcome development came from the trade balance: the trade deficit continued to grow but at a much slower pace than 2007 (the annual growth rate was around 10% in the first half of 2008, well below 67% last year). A major harbinger of this improvement has been the RON depreciation against the euro, which has made exports more price competitive and imports more expensive. In other areas the services’ balance performed the worst compared to last year, with tourism a major loser; there was a slight improvement in net inflows from transportation. However the current transfers’ surplus increased by 20% (mainly due to government transfers – probably due to some inflows coming from EU; the private transfers (mostly remittances) remained flat), while income deficit growth decelerated significantly to 9% yoy compared to 36% at the end of 2007, these developments having a favourable impact on the current account balance dynamics.
Nevertheless, upside risks exist for the second half of the year as exports may ease on the slowdown of the euro zone economy (with impact on the external demand) and further deterioration in the dynamics of remittances from Romanians abroad might occur (due to worsening economic conditions in more advanced countries, especially Spain). That is why we consider that for this year the current account deficit might reach 14.7% in GDP, with a correction expected in 2009. Romania should not rely on the exchange rate alone in order to correct its external disequilibrium, which certainly assists the process in the short run. Romania needs structural changes in its economy through investments made in exports-oriented sectors, and in developing domestic industry to create enough supply to cover the demand (nevertheless, consumption has to ease as up to now it has maintained levels that are unsustainable).
This year Nokia opened a plant near Cluj, while Ford bought Automobile Craiova, with production estimated to start there next year. Such investments have roused the interest of some other potential investors with several big names including Mercedes, Mitsubishi, Citroen, Audi and steel producer Voestalpine announcing an interest in opening facilities. But an important loss was already the announcement of Mercedes choosing Hungary over Romania because of Romania’s poor infrastructure and incentives available for foreign investors in Hungary.
Coverage of the current account deficit by foreign direct investments stayed above 60% in the first half of 2008, but over the last 12 months it barely reached the 50% level. EU funds might have a positive contribution in covering/diminishing the deficit, depending on their destination being considered capital transfers or current transfers; they are important as they do not involve any debt from the Romanian side. Up to June 2008 the Ministry of Economy and Finance has approved projects involving structural funds in total value of EUR 2.5 bn, of which 1.9 bn are EU funds; the time frame for these funds to materialise is unknown and could exceed this year).
