Romania’s country rating remains “B.”
This year will be more difficult for the Romanian economy in a bleak European context featuring recession in the Euro Area and the shrinkage of crediting against the backdrop of recapitalization of foreign banks present on the local market, Cristian Ionescu, Coface Country Cluster Manager for Romania, Bulgaria and Slovakia, stated yesterday during a press conference.
“Against this unfavorable backdrop, Romanian companies will face a drop in export demand, a deterioration of access to financing, weak private consumption and a poor level of investments. The only chance for economic growth in 2012 would be a significant growth in the public investments area and in the absorption of European funds. Being an elections year too, it’s important for any expenditure to be channelled into economic growth instead of fuelling possible imbalances,” Ionescu stated.
He added that Romania will register an economic growth of 1 – 1.5 per cent in 2012 and that agriculture, exports and industrial production, which were the engines of economic growth in 2011, will have lower contributions, the latter set to be partially compensated by the recovery of consumption, particularly public consumption, against the backdrop of an elections year. Likewise, the average annual inflation rate will drop from 5.8 per cent to 3.3 per cent.
“Exports, 55 per cent of which go to the Euro Area that is in recession, will contract. Nevertheless, private consumption will be backed by a recovery of available income generated by the unemployment rate’s drop to 7 per cent, below the EU average, and an inflation drop that a good harvest allows,” Coface’s representative stated. Coface estimates that FDI will reach EUR 2.2 bln in 2012, up from EUR 1.79 bln in 2011.
At the same time, Ionescu added that the banking system is affected by a high level of bad loans and the Euro Area banks affected by the sovereign debts crisis own 72 per cent of Romanian bank assets. “They may be forced to significantly lower their exposure on Central European markets in what concerns the new liquidity demands imposed by Basel III. Romanian banks are dependent on loans from parent-banks because of the insufficiency of deposits (the loans to deposits ratio stands at 120 per cent),” the head of Coface Romania stated. He pointed out that the risk of refinancing from the extremely vulnerable parent-banks in Greece, whose debts represent 12 per cent of Romania’s GDP, is very high. “In this context, the volume of credit offers should be increasingly lowered,” Ionescu pointed out.
Coface has maintained Romania’s country rating at “B,” representing a class of risk for unstable economic and political environments, a rating capable of continuing to affect an already poor payments history.
Exchange rate won’t surpass RON 4.4/EUR
Coface estimates that the exchange rate will stand at RON 4 – 4.4/EUR in 2012. In case this level is surpassed, the company does not expect the National Bank of Romania (BNR) to intervene in order to stabilize it.
Likewise, Coface estimates that the monetary policy that BNR will adopt will be preventive and accommodative in nature in order to stabilize the inflation rate, and will feature a monetary policy interest rate ranging from 5.5 per cent to 6 per cent in 2012. According to Coface data, the average annual inflation rate will drop from 5.8 per cent to 3.3 per cent.
Budget deficit of just 3.5 per cent
“We estimate a budget deficit of 3.5 per cent for 2012. The government’s target is far too ambitious for this year. The austerity measures have led to a budget deficit of 4.35 per cent in 2011. The budget deficit target of 3 per cent that the government agreed with the IMF for 2012 is unlikely to be attained, given the fact that it was set as part of a scenario featuring an economic growth of 3.5 – 4 per cent. Given an economic growth of 1.5 per cent in 2012, in the absence of further expenditure cuts this year’s budget deficit can vary from 3.5 to 4 per cent of GDP,” Cristian Ionescu stated.
According to Coface data, the current account deficit will deepen to 4.5 per cent in 2012 because of a drop in exports, while the trade deficit is estimated at 4 – 4.5 per cent of GDP. The main risks have to do with pro-cyclical policies, the low level of expenditures and the low level of absorption of European funds. “Pro-cyclical policies are not helpful. Economic growth does not stem from spending less, it stems from expenditures channeled on those directions that generate growth and added value. Private indebtedness, population’s indebtedness, a high current account deficit, a low degree of absorption of European funds, and a low level of government revenues are also among the risks in 2012,” Cristian Ionescu added.
Protests not scaring investors
The protests that took place in Romania in recent days represent a democratic exercise, do not scare foreign investors and do not affect the country’s rating, Ionescu added. They will have a negative impact on investors only if they turn violent as the ones seen in Greece.