New political uncertainties prior to the next year’s elections, especially the presidential ballot, could have an impact on investor confidence, the Fund warns.
Romania’s economic recovery will continue in 2014 with a 2.2 percent increase in the real GDP and an increased domestic demand, accompanied by a stronger absorption of European funds and an increase in private sector loans, according to the IMF (the International Monetary Fund) experts’ report presented to the Board who has recently approved a new stand-by agreement with Romania, Agerpres informs. A 2.5 percent increase in the real GDP is expected in 2015.
The report shows an economic growth of 2.2 percent is expected in 2013, accompanied by a return to normal in the agriculture sector following last year’s draught and an increase in exports, especially in non-EU countries. The first forecast, regarding a 0.3 percent increase in the second quarter real GDP (1.3 percent per year) is in line with the projected outcome. Inflation is expected to continue to drop in the second half of 2013 to 3.3 percent by the end of the year, reaching the target interval set by BNR of 2.5+/—1 percent. The decrease is related to a good harvest which could generate lower food prices. Inflation will continue to drop in 2014 to 3 percent by the end of the year and 2.9 percent in 2015.
The current account deficit will drop to 2 percent of GDP in 2013. Internal demand will maintain a low level and imports will increase much slower than exports. Between 2014 and 2015, the current account deficit is expected to slightly increase up to 2.5 percent and 2.7 percent, respectively, of GDP, while domestic demand will begin a slow recovery. Considering the significant amounts paid to IMF, international reserves will drop from EUR 34.1 billion in 2013 to EUR 31.6 billion in 2014 and EUR 30.5 billion in 2015.
According to the report, however, there are also many risks involved. Extended recession, coupled with re-emerging financial tension in the Euro Zone might put a break on exports, setting off an even more pronounced decrease in foreign investments, while accelerating the cut-back of bank debts. New political tension prior to next year’s elections, especially where presidential elections are concerned, might give rise to new risks, such as delays in structural reforms agreed-upon with the Fund, missing set targets or deteriorating investors’ confidence, according to the IMF report, Mediafax notes. MEP elections are scheduled next summer and presidential elections will be held in late 2014. If these structural reforms are not implemented, existing limitations could become more encumbering, eventually leading to a more modest economic growth trajectory.
Stricter monetary policies within advanced economies could set off capital outflows, causing investors to better re-evaluate portfolio risks and proceeds. Any of these projected evolutions could put pressure on the exchange rate, and, thus, influence banks’ and investors’ balance sheets, considering the large loan volume in foreign currency. If this scenario is carried out, economic indicators including Romanian exports in the Euro Zone, its main trading partner, in the 2013-2015 period and direct foreign investments will report lower values than in the base scenario. Furthermore, internal demand would weaken and current account deficit for the 2013-2015 period would deepen. According to the negative scenario, economic growth would be diminished with a total of 2.5 percent, to 1.5 percent in 2013, 0.3 percent in 2014 and 2.3 percent in 2015. Smaller capital inflows would need additional external financing of EUR 5 billion, which would be covered with support from the Fund, the EU and the World Bank, as well as through limited withdrawals from international reserves. In such a case, additional fiscal measures would most likely be necessary in 2013 to achieve the program’s objectives.
Increased pressure to adopt populist measures
The creditor in Washington also warns that following Romania’s exit from the European Commission’s excessive deficit procedure the pressure to adopt populist measures has increased, but authorities must resist it in order to avoid the reversal of difficult reforms or the emergence of new risks. The European Union Council stopped the excessive deficit procedure against Romania in late June. In addition, the IMF recommends overcoming “internal conflicts” that have been the cause of delays in institutional reforms, like the investment planning area.