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January 31, 2023

S&P shares IMF view: Romania to post 0.8 pc economic growth in 2010

Rating agency estimates GDP will next year climb 2.5 per cent and unemployment rate will slightly decline, to 9.5 per cent, having peaked at 9.7 per cent this year.

Following into the footsteps of the International Monetary Fund’s Romanian economic growth estimate going down from a previous 1.3 per cent to 0.8 per cent, Standard&Poor’s rating agency report on Friday perfectly matched that view.

Fourth quarter results in 2009 were less than economists expected, this is how Mihai Tanasescu, Romania’s representative with the International Monetary Fund (IMF), explained the estimate adjustment. He also said services continued to perform poorly, and consumption is yet to give a rebound signal. “Given the circumstances, VAT too will fail to show better performance,” he said, adding that the new assessment will be on the agenda of talks Romanian authorities will have with IMF delegates in Bucharest later this month. For its part, S&P maintains Romania’s economy will rise 0.8 per cent this year, on the back of foreign demand, and up to 2.5 per cent in 2011, which shows a financial optimism not shared by IMF for the said interval. S&P analysts consider the economic growth pattern will change towards one relying less on crediting.

S&P experts note Romania has gone through severe economic recession that began in 2009, rooted mainly in a contraction of local demand triggered by lower crediting, with diminished foreign demand to only make the situation worse. Experts predict domestic demand, consumption chiefly, will remain at a low level due to unemployment rising from 4.4 per cent in 2008 to about 8 per cent in 2009, and projections speaking about the trend going to continue in the short term. The agency predicts average joblessness rate will go up from 8.1 per cent last year to 9.7 per cent this year, and will decrease slightly, to 9.5 per cent, in the next. S&P expects Romanian exports to resume their growth this year given the economic situation improving across the EU and other global regions, along with higher Romanian competitiveness following RON depreciation, and low domestic consumption.

However experts stress Romanian economy remains less open than that of other states in the region, given exports only account for about one-third GDP, of which more than two-thirds aimed at the EU area.

RON likely to stand ground

RON will most likely stand its ground in spite of economic environment staying difficult, given government’s funding needs being lower than expected and growing National Bank of Romania (BNR) reserves, combined with a positive change in capital flows, S&P experts also note RON likely to appreciate will help inflation going down even deeper, while it would nonetheless offset benefits of last year’s depreciation. Financial sector wise, experts reiterated their expectations for banking asset quality to deteriorate, adding that a capital adequacy rate of nearly 14 per cent in late December 2009 should provide a margin of safety. In early March, S&P revised up, from negative to stable, Romania’s long-term home and hard currency rating forecast, as a result of the sustained budget reform programme and government likely to stick to the IMF agreement. Romania has had long and short term currency ratings confirmed, to “BB+” and “B” respectively, and “BBB-” and “A3”, for the home currency, long and short-term.

Fiscal consolidation strategy, successfully implemented

S&P holds government has successfully put into practice its fiscal strengthening strategy and will likely carry on its tax policy restrictions this year. According to the S&P calculus methodology, Romania’s budget deficit rose from 5.4 per cent GDP in 2008 to 7.8 per cent GDP last year, but will fall to 6.4 per cent GDP in 2010, in line with IMF demands. Still, agency analysts don’t rule out snap legislative elections being held. Experts draw attention to the difficulties government is facing, among which justice reform and corruption crackdown, showing that unless progress is made in those areas, the European Commission might exercise its power to freeze or even shut European funding off. IMF and other international financial institutions are likely to continue providing assistance to some states in Central and Eastern Europe, including Romania, despite occasional non-compliance with the terms stipulated in the agreement. S&P reports Romania, Serbia and Hungary reap benefits from stand-by agreements, which should translate in fiscal consolidation in upcoming years, provided governments implement adequate budgetary policies.

Weak budgetary performance, public debt keeps growing

Romania’s public debt has risen fast over the past two years, with the trend expected to continue, from 27.4 per cent GDP this year, to 32.5 per cent in 2011, given the poor budgetary showing, agency analysts forecast, adding that the amount of debt owed by the Romanian private sector rising fast may lead to government going to carry a ‘financial burden’, if forced into assisting a financial institution in distress. S&P predicts public debt will continue to rise, to 36.6 per cent GDP in 2013.

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