COMMENT: Romania economy bottoms but only gradual recovery seen

By bne IntelliNews March 30, 2011

Peter Brezinschek and Ionut Dumitru of Raiffeisen Bank International -

Following several years of rapid growth, the Romanian economy entered recession in 2008 as a result of the global economic crisis. While most of the economies in Central and Eastern Europe (CEE) showed initial signs of recovery towards the end of 2009 and rebounded to varying degrees in 2010, the Romanian economy continued to contract this past year. We predict that Romania's GDP will grow in 2011, marking the economy's first growth following the crisis.

"In CEE, the Romanian economy was definitely one of the most affected by the global economic crisis. However, the decline in Romania's GDP appears to have bottomed out in 2010, when it fell 1.3%," says Peter Brezinschek, head of Raiffeisen Research.

Brezinschek predicts a gradual recovery in the country's economic activity over the course of the current year, with increasing external demand continuing to bolster export volumes and contributing to overall GDP growth of 1.5% in 2011. Romania's GDP growth rates in the years ahead will come in below the levels recorded between 2000 and 2008, reflecting the fact that foreign capital inflows will be lower. Raiffeisen estimates that the CEE region's average GDP growth rate was 3.1% in 2010 and forecasts it to rise to 3.7% in 2011.

Reducing the budget deficit

Since 2009, Romania has borrowed around €12bn from the International Monetary Fund (IMF), but decided not to draw the final tranche of €1bn. The country borrowed €3.65bn from the European Commission (EC) and is expected to receive the final tranche amounting to €1.35bn at the end of March. The funds allowed Romania to finance its external financing gap and large budget deficit, thus cushioning the size of the recession. The Romanian authorities had to implement an ambitious fiscal consolidation plan, and succeeded in reversing the totally unsustainable trend in the fiscal policy.

"Under the agreements with the IMF and the EC, Romania's government pledged to further reduce the budget deficit from 6.5% of GDP in 2010 to 4.4% this year and to 3.0% in 2012. Most of the measures required to achieve this fiscal budget consolidation have been already enforced. It now rests solely with the Romanian government to stick by these measures and refrain from inflating public spending again," says Ionut Dumitru, head of research at Raiffeisen Bank in Bucharest.

Inflation risk

Unwelcome developments in food and oil prices on the external markets, as well as in locally administered prices, might place Romania's inflation rate on a path that threatens the target band of 2-4% and is incompatible with the forecast announced by the country's central bank. Raiffeisen Research's analysts expect the annual inflation rate to decrease significantly in 2011, although the year-end inflation rate is likely to remain high compared with both that in other EU countries and to the central bank's target. Romania's inflation rate rising above 4.5% cannot be ruled out completely, according to the analysts. "Accordingly, inflation will continue to be a serious challenge for the central bank and a key issue for monetary policy decisions in 2011," Brezinschek says.

Raiffeisen Research expects the Romanian leu to appreciate marginally in nominal terms in the coming quarters if there are no slippages in public policies, and no other risks materialize on the external markets. The improvement in macroeconomic imbalances in the context of high yields and interest rates is expected to result in an increase in foreign players' appetite for leu-based assets. However: "Having a strong currency in real terms might negatively impact exports, the only sector making a positive contribution to Romania's GDP growth over the past few quarters. Consequently, a rapid appreciation of the leu is not desirable," Dumitru says.

Risks for a leu depreciation might come from adverse political developments or from slippages in public policies.

Romania's equity market continues to book gains this year on the back of its positive development in 2010. The main story for this upswing has been the ongoing economic recovery at the global level and the related decline in investors' risk aversion towards growth markets. Increasingly, investors' attention is turning to the long-term growth perspectives that Romania offers for its companies and investors. "All in all, we expect a fundamentally positive development on the Bucharest stock market over a one-year horizon. The stabilisation achieved with fiscal policy measures, together with the slow but gradually strengthening economic recovery in Romania, is boosting international investors' confidence in the country, which is reflected in higher inflows of capital from abroad," says Brezinschek. "In fundamental terms, the valuations of the shares listed in the BET index are attractive. With a moderate price/earnings ratio of 10.5 based on anticipated earnings for 2011 - this represents a gain of 22% versus 2010 - the BET looks poised to do well both by regional CEE and international standards. If conditions for equity markets remain positive at the global level, the Romanian stock market should continue on its path of recovery this year."

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