Country Report Romania
Romania’s government has been successful in reducing the budget deficit, thereby meeting the IMF conditions attached to the standby agreement. Nonetheless, Romania’s economic crisis remains a cause for concern. In 2012 as a whole, the economy grew by 0.2% and although we expect a somewhat higher growth rate in 2013, depressed domestic demand and unfavourable external conditions will obstruct a strong recovery. In the meantime, the IMF standby agreement will expire in April 2013, forcing the government and the IMF to broker a new deal. In all likelihood, the IMF will demand structural reforms, including the privatization of some large state-owned enterprises. The government, in turn, needs to find a way to implement further austerity measures without choking any signs of recovery.
Introduction and update
Romania’s recovery from the crisis in 2009-2010, when GDP fell by 6.5%, has yet to gain pace. We expect the economy to have grown by a meagre 0.2% in 2012. The slow growth is largely caused by the ongoing crisis in the eurozone and slow demand at home. In addition, a poor harvest caused the agricultural sector to contract by 20% in the first three quarters of 2012. For 2013, we expect GDP growth to accelerate somewhat to about 1%, as external conditions are expected to improve. Nonetheless, with a non-performing loan ratio of 26%, credit conditions will remain tight. In addition, households will continue to deleverage and the government is expected to implement a new round of austerity measures. Clearly, this will depress domestic demand for some time to come. Finally, although the risk of a worsening of the eurozone crisis decreased, adverse external conditions could still lower our growth expectation for 2013. Meanwhile, inflation remains above the 3% target, although the past three months saw inflation drop below 4%. Still, the central bank has very little room to manoeuvre.
The only good news is that, as domestic demand remained subdued, the current account deficit shrunk further in 2012, reaching 3.6% of GDP, from 4.3% of GDP in 2011. In addition, between October 2012 and January 2013, FDI inflows increased by over 20%. It is the first time since 2008 that FDI inflows increased. However, they are still far below their pre-crisis levels.
In the parliamentary elections of December 2012, the governing UCL, led by Prime Minister Victor Ponta, won over 60% of the seats, securing a second term in government. In contrast, the Alliance of Romania’s right, an alliance formed by a number of right-wing parties, only won 13.6% of the seats and was disbanded shortly after the elections. The victory of the UCL helped boost investor confidence, causing a fall in government bond yields. Nonetheless, the road ahead will be bumpy. For one, the UCL’s victory could be viewed as a resounding vote against austerity. Victor Ponta’s success is mainly based on the fact that the austerity measures implemented by his predecessor (who was forced to step down in April 2012) were exorbitant, even overshooting IMF targets. In comparison, Victor Ponta’s policy direction has been mild. Nonetheless, Victor Ponta and his coalition will have to commit to further austerity measures and reforms if they are to secure a second IMF deal. Given the anti-austerity sentiment among the public, this could prove difficult.
In April 2013, Romania’s standby agreement with the IMF will expire. New negotiations over a second standby agreement are ongoing, although it is not yet certain Romania will accept a second deal. Early statements by the IMF show that the organization has been impressed by Romania’s monetary and fiscal policies over the last three years. Indeed, during this time the central bank has taken measure to curtail inflation, while the government successfully reduced the budget deficit from 7.3% of GDP in 2009, to 2.2% of GDP in 2012. Nonetheless, the IMF is expected to demand further structural reforms, an area in which Romania has performed less well. Specifically, the IMF is expected to demand the sell-off of some major state enterprises, including the airline Tarom and rail freight company CFR Marfa. Whether Romania accepts these conditions will largely depend on the economic necessity of another standby agreement.