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4, IST YEAR

Romanian economy bottoms out gradual recovery expected

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. In their publication 'Strategy Romania', published today, the analysts of Raiffeisen Bank International AG (RBI), Vienna, and Raiffeisen Bank S.A., Bucharest, 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 per cent,' said 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 per cent 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 Research estimates that the CEE region's average GDP growth rate was 3.1 per cent in 2010 and forecasts it to rise to 3.7 per cent in 2011. Government plans to reduce budget deficit to 4.4 per cent of GDP Since 2009, Romania has borrowed around EUR 12 billion from the International Monetary Fund (IMF), but decided not to draw the final tranche of EUR 1 billion. The country borrowed EUR 3.65 billion from the European Commission (EC) and it's expected to receive the final tranche amounting to EUR 1.35 billion at the end of March 2011. 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 per cent of GDP in 2010 to 4.4 per cent this year and to 3.0 per cent 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,' Ionut Dumitru, Head of Research at Raiffeisen Bank S.A., Bucharest explained. Inflation rate to decrease significantly in 2011 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 to 4 per cent 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 yearend inflation rate is likely to remain high compared to both that in other EU countries and to the central

bank's target. Romania's inflation rate rising above 4.5 per cent 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 is convinced. Stable or slightly appreciating exchange rate 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 said. Risks for a leu depreciation might come from adverse political developments or from slippages in public policies. The Romanian economy has stabilized and is now ready for a new growth cycle, said Mugur Isarescu, governor of the Romanian National Bank (BNR) during the Gulf-Cooperation Council Romania economic forum organized by Forum Invest in Bucharest. Although the recovery took longer that it was initially estimated, Isarescu argued that current data shows that the probability of recurrent economic imbalances is reduced. The governor also emphasized that this time the economic growth should be a sustainable and export driven one. Romanias external debt has decreased from about 12-14 percent in 2008 and 2009 to 5 percent. We hope to remain in the 4-6 percent limit which is a sustainable level, the governor stated. Regarding inflation, Isarescu said that BNR hopes to bring it below 4 percent by the end of the year. He added however, that there are reasons for worry. Overall, the Romanian economy is estimated to grow by 1.5 percent in 2011. The local sectors recommended by the governor to Gulf investors are infrastructure, energy, agriculture and tourism. We should give foreign investors the confidence that they will invest in a stable and predictable business environment. From the perspective of BNR there are considerable opportunities to set up solid and profitable businesses on the long run in this country, said Isarescu. But more than money, Romania needs entrepreneurs, the governor argued. What does this country need? Not money, but entrepreneurs capable to deliver projects. We are a country where too many projects have been started and not finalized, Isarescu said adding that there are 40,000 such projects. In his opinion this explains why, although Romania has an investment budget, the results fail to appear. Source: http://business-review.ro