By BCR Expert’s Column
Weakening external demand will reduce GDP support in the remainder of this year and in 2012; feeble private consumption, pressured by negative take-home pay and wavering investment confidence ahead, presage a cool-off of the Romanian economy even before seeing steadier growth rates; this is all the more true as the country has displayed high dependence on foreign funding during the pre-crisis period.
Fiscal consolidation has been on track so far, but elections are just around the corner (2012) and fears about a likely fiscal slippage begin to mount; with a fiscal consolidation program that has made it only half- way and elections approaching rapidly – the confidence in the centre-right government is low in confidence polls – Romania will have to walk a tightrope to avoid downgrades or changes in the outlook by major rating agencies.
The short-term inflation outlook is better now. But for how long? The good vegetable crop has so far been the only downward driver of inflation. In the longer run, however, Romania will have to cope (more or less) with the price convergence in energy prices. Not so much perhaps next year (elections!), but after that. The IMF has urged the cabinet to draw up a clear-cut agenda of administered price liberalization. The share of natural gas and electricity in the total CPI basket is very high in Romania compared to the Euro Zone (8.7% vs. 3.9%) and the impact of any percentage point hike in energy prices on inflation is more than two times higher in Romania than in the Eurozone. Policy consistency in the aftermath of next year’s elections is also raising concerns; although opposition parties have toned down their rhetoric on the tough fiscal measures implemented by the current center- right cabinet, it remains to be seen how things will play out after 2012; populist statements/decisions could harm the country a lot in 2012 and international financial markets show no signs of tolerance towards Romania. Political stability is a key ingredient for Romania to regain composure, all the more so as ‘growing under your own steam’ seems to be the key phrase for the years to come.