Romania in 2012: Growth interrupted
 |
Noiembrie 2011 |
 |
JOAN HOEY - Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT |
Adresa
26 Red Lion Square, London WC1R 4HQ, United Kingdom
Telefon
+44-020-7576 8181
Fax
+44-020-7576 8476
Website
www.eiu.com
JOAN HOEY
Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT
The Economist Intelligence Unit has reduced its 2012 real GDP growth forecast for the Euro zone, with negative consequences for Romania’s recovery from the 2009-10 crisis.
The Economist intelligence Unit has revised down its forecast for global GDP growth measured in terms of purchasing power parity (PPP) to 3.3% in 2012. Of particular significance for Eastern Europe is the revision for Euro zone growth from 0.8% for 2012 to -0.3%. The debt crisis in the Euro zone shows little sign ofresolution, despite greater attention from political leaders. Stress on Euro zone banks is deepening. Most Euro zone economic indicators have turned negative and a recession seems inevitable. We have also lowered our forecast for US economic growth in 2012, to 1.3%, as contagion effects from the Euro zone on US financial markets and banks curb business investment and consumer spending. Following on from our downgrades to Euro zone and US growth next year, we have also reduced our growth forecasts for most emerging markets.
Quarter-on-quarter growth in the Euro zone slowed to 0.2% in the second quarter of 2011, from 0.8% in the first three months of 2011. Of special concern is the fact that the German economy – hitherto the East area’s growth engine and the biggest market for East European products – almost stalled in the second quarter. From the vantage point of October 2011 the risk of a new global recession is very high. However, even if it were to occur, a global recession would probably be relatively mild in comparison with the severe downturn of 2008-09, unless alsoaccompanied by a meltdown in financial markets on a similar scale to that which occurred in the wake of the collapse of Lehman Brothers in 2008. The Eurodebt crisis would be the most likely source of such a meltdown. Unlike in 2008, however, governments now lack either the political will or the financial wherewithal (or both) to respond to slowing demand with a policy stimulus.
As in 2009 and 2010, Eastern Europe has remained among the weakest performing emerging-market regions in 2011. Final demand in Euro zone tradepartners has been weak, and there has been no rebound in foreign direct investment (FDI). Credit conditions have been slow to improve in most countries, and private consumption is constrained by still-high unemployment. Fiscalconsolidation is well under way, but might have to be accelerated as market sentiment towards the region sours. The negative impact of thedeteriorating external outlook on the region’s growth has been reinforced by disappointing data for the second quarter of 2011. As a result of thesedevelopments, there have been significant downward revisions to the 2012 growth forecasts for most countries in the region.
Financial vulnerability
Earlier expectations that the region would be resilient to troubles in the Euro zone are proving misplaced. Currencies and stockmarkets across Eastern Europe have suffered sharp falls in recent months. Business and consumer sentiment in the region is fragile, and its currency and bond markets are vulnerable to contagion from troubles in the Euro zone and heightened risk aversion. A credit event involving the Spanish or Italian markets would hit banking sectors across the region through theimpact on West European parent banks.
The more advanced East European transition economies have more solid growth prospects and better fiscal management than many West European, and especially South European, Euro zone countries (although comparative data show that fiscal positions in Eastern Europe are not as solid as in some other emerging-market regions, and several countries in the region have high debt and rely heavily on foreign funding). Central and Eastern Europe avoided a financial crisis in 2009 when Western banks agreed to maintain their capital commitment at pre-crisis levels (the so-called Vienna initiative). The abundance of liquidity and the fiscal largesse of West European governments made it easier for the banks to commit.
Now the fiscal stance has changed, and European bank stress tests in 2010 and 2011 have failed to convince markets that banks’ exposure to the sovereign debt of peripheral Euro zone countries would be manageable if one country or more were todefault. The assumption that West European banks will maintain their exposure to Eastern Europe come what may is likely to be wrong. The impact of the slowdown in Euro zone growth magnifies the contagion risks for Eastern Europe.
The IMF has warned that an escalation of tensions in the Euro area could have dire repercussions for emerging Europe, by affecting cross-border production chains and affecting the supply of credit from parent banks to subsidiaries in the region, resulting in a further curtailment of credit to the business sector. In the case of Romania, the IMF has stressed the importance of strengthening fiscal discipline and lowering non-performing loans to reduce vulnerabilities in the banking sector. TheIMF also stresses the importance of strong fiscal rules, capping government expenditures and debt, to enhance the credibility of fiscal consolidation.
The negative consequences of a Greek sovereign default would hit the Balkan countries, where Greek banks are most active and where the economic recovery is most fragile. However, a credit event involving the much larger Spanish or Italian debt markets would have much wider consequences; the balance sheets of many large West European lenders active in Eastern Europe would suffer. The risk hasincreased that turmoil could spread to Eastern Europe in the coming months. The latest bail-out deal for Greece fell far short of providing a solution to the Euro zone’s sovereign debt crisis.
Balkan laggards
The Balkans are returning to growth, albeit at a slow pace. The Euro zone slowdown was already reflected in slower year-on-year growth in the second quarter in South East Europe than in the first quarter. Domestic demand, which recovered strongly insome East European economies in the first half of 2011, stimulating growth, remained weak in the Balkans, where consumer confidence remained depressed. Continued external imbalances mean that a number of Balkan economies remainvulnerable to crises. The Balkan countries are also exposed to fallout from Greece’s problems because of investment, trade, remittances and banking links.
Romania’s recovery from the recession in 2009 and 2010, when real GDP fell by 7.1% and 1.3%, respectively, has been lacklustre, with real GDP growing by 1.6% in the first half of 2011. Short-term prospects look modest, especially given continuedausterity measures, the worsening outlook for the world economy, and for the Euro zone in particular. Romania generates 72% of its export revenue in the EU, so negative growth in its main export markets will have a deleterious impact on its own growth.
Despite an expected deceleration in the second half of 2011, export growth will provide the main stimulus to industrial growth, whereas consumption and investment will remain depressed. A good harvest in 2011 should partly compensate for theslowdown in industrial output growth and the continuing crisis in construction. However, we estimate that economic growth will be a disappointing 1.5% in 2011 and forecast 2% growth in 2012, given the worsening outlook in the Euro zone.
Growth is forecast to pick up in 2013-16, to an annual average of 4.3%. Romania has to undertake a considerable fiscal retrenchment, entailing large cuts in public-sector employment and wages, under its medium-term fiscal programme with the IMF. This will have a dampening effect on the recovery of domestic demand. The curtailment of capital inflows, and the likelihood that these will be slow to return to pre-crisis levels, will have an adverse effect on investment growth in the short term. There is little prospect of a strong recovery in foreign direct investment (FDI) and other external flows until 2013.
However, planned infrastructure investment should stimulate a recovery in the construction sector in 2012-15, although prospects for a recovery in the housing market are not good. Domestic demand will be hampered by progressive fiscal tightening, which will also dampen government spending, but average annual growth of more than 4% is attainable if Romania improves its absorption of available EUfunding under the new minister for EU affairs. Improved absorption capacity would contribute to essential investment in infrastructure, which would boost export potential over the longer term. However, administrative deficiencies and the need forgovernment to co-finance projects at a time of fiscal consolidation will limit the prospects for a significant improvement.
FDI under threat
Net inflows of (non-residents) foreign direct investment (FDI) into Romania fell by 52% year on year to EUR 1.1 bn in January-August 2011 and covered 34% of the current-account deficit, implying that net FDI amounted to just EUR 11 mn in August, assuming that figures for earlier months have not been adjusted downwards. Net FDI has fallen steadily from EUR 6.7 bn in the first eight months of 2009, amid growing concerns that potential investors are being deterred by bureaucracy and slow moving judicial and parliamentary processes and a relatively unattractive fiscal environment.
Foreign companies operating in Romania have argued that bureaucracy, high administrative costs and an uncertain fiscal climate are making Romania less attractive than Serbia, Hungary and Bulgaria as a destination for FDI. The cite the sudden increase in value-added tax (VAT) from 19% to 24% in July 2010 as affecting the costs and profitability of foreign companies operating in Romania, particularly firms using Romania as an export base. Businesses have little confidence in the Romanian tax regime, with the major criticism being the size of social security contributions.
