Romania Business Forecast Report

Q4 2009

Publication Date	September 2009
Publisher	Business Monitor
Product Type	Report
Pages	58
ISBN Number	not applicable
Product Code	BMI02722

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Summary

Downturn Likely To Stabilise In H209 The business cycle in Romania is close to reaching its nadir, with the pace of deceleration likely to slow at some point during Q309-Q409. To be sure, having experienced four straight quarters of slowing growth, we expect base effects to support headline growth during H209. What is more, given the collapse in domestic demand and external trade, combined with stock depletion, we expect inventory re-stocking to bolster the headline growth reading, though this is likely be a one or two quarter dynamic at best. Moreover, we stress that while economic conditions should stabilize during H209, we do not expect to see a rebound in growth, but rather an anaemic recovery weighed down by deleveraging and rising unemployment, essentially producing a 'jobless recovery'. This in turn will keep demand on social spending in play, compounding the government's efforts to rein in the fiscal deficit and satisfy IMF loan conditionalities.

The pressures on Romania's coalition government continue to build, with risks to political stability emanating from the deterioration in economic conditions, as well as the potential for a damaging struggle between the two coalition members ahead of presidential elections. In the case of the latter, we highlight the potential for a growing rift between the coalition members (the Social Democratic Party & Conservative Party Alliance [PSD & PC] and the Democratic Liberal Party [PD-L]), which in turn would threaten political stability. While dissolution of the coalition is not part of our core scenario, we caution that should a divergence of opinion on ideological grounds start to emerge between the centre-right PD-L and left-leaning PSD-PC alliance, particularly over the magnitude and focus of spending cuts, the risks of the government collapsing would concomitantly rise.

The adjustment to Romania's balance of payments position is now fully under way, with the latest data showing a 73% year-on-year (y-o-y) contraction in the current account deficit during the first half of the year. While the collapse in the current account deficit is positive for financial stability, we stress that the sharp adjustment is nonetheless indicative of Romania's deepening recession. To be sure, while we believe that the correction to the balance of payments towards a new sustainable equilibrium will be beneficial for long-term financial and economic stability, the headline data somewhat masks the severe implosion of domestic demand which has been necessary to bring forward an adjustment of this magnitude.

Affirming that the disinflationary trend remains firmly engaged, headline inflation in Romania continued to head south in July, having broadly trended down since July 2008. The latest inflation print came in at 5.1% y-o-y, down from 5.9% in June and marking the slowest rate of growth in consumer prices since August 2007. We expect the disinflationary process to run further, though we do not expect a prolonged period of deflation to ensue.

Content

Executive Summary
Downturn Likely To Stabilise In H209
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Risks To Coalition Stability Mounting
- We believe that the risks to political stability in Romania are on the rise
- Table: Political Overview
- Domestic Politics II
- Convergence Towards EU Norms To Continue Slowly
- While the European Commission's 2009 annual report on reform of the judiciary and improvements to the rule of
- law in Romania was not as critical of the country's progress as that in 2008, it is clear that the EC believes that
- Romania needs to introduce further reforms to meet EU norms
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Economic Stabilisation In H209, Expect A Weak Recovery
- According to a flash estimate, the Romanian economy shrank by 8.8% y-o-y during Q209, marking an acceleration
- in the rate of decline since Q109 and confirming its place as one of the worst positioned economies in CEE
- Table: ECONOMIC ACTIVITY
- Balance Of Payments
- Import Implosion To Drive C/A Towards Balance
- The substantial correction to Romania's balance of payments position during the first half of the year is positive
- for financial and economic stability going forward, though also reflects the severity of the deepening domestic
- recession
- Table: BALANCE OF PAYMENTS
- Monetary Policy
- Disinflation To Continue, Deflation Unlikely
- We expect inflation in Romania to continue moderating, though outright deflation is unlikely
- Table: MONETARY POLICY
- Exchange Rate Policy
- Depreciation Pressures Diffused
- Following its precipitous sell off during H208 and early 2009, the Romanian leu has since stabilised during the
- second quarter, remaining committed to a RON4.1200-4.3500/EUR band
- Table: EXCHANGE RATE
- Banking Sector
- Weathering The Storm
- Romania's banking sector has fared well against the international financial crisis, owing in large part to the
- relatively acceptable degree of leverage, an absent funding gap, and given that the size of the industry has not
- eclipsed that of the national economy, unlike elsewhere in CEE
Chapter 3: 10 Year Forecast
- The Romanian Economy To 2018
- Economic Growth Will Remain Robust
- Romania's economic growth is forecast to average 5.8% between 2014 and 2018, compared with a forecast 3.4%
- between 2011 and 2013
- Table: Long-Term Macroeconomic Forecasts
Chapter 4: Special Report
- The Fate Of ???Chindia'
- Overview
- Although China and India will continue to grow during the global recession of 2009-2010, they are not
- immune to the downturn, and face a number of risks in the near term
- China And India SWOT
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Institutions
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- Infrastructure
- TABLE: LABOUR FORCE QUALITY
- Market Orientation
- Table: Europe, FDI Annual Inflows
- TABLE: BMI TRADE RATINGS
- Table: Top Export Dest inations
- Operational Risk
Chapter 6: Key Sectors
- Tourism
- Executive Summary
- This quarter, BMI has revised down its negative annual growth forecast for foreign visitor arrivals in 2009 to
- -15% (we had previously anticipated a decline of at least 10% y-o-y)
- TABLE: Acc ommodation Data
- Petrochemicals
- Executive Summary
- The restructuring of Romania's petrochemicals industry is facing headwinds as producers reduce investment
- and operating capacity in response to falling demand
- Table: Romanian Petrochemicals Indicators, 2006-2013
Chapter 7: BMI Global Assumptions
- Global Outlook
- TABLE: GLOBAL ASSUMPTIONS
- Table: GLOBAL And REGIONAL REAL GDP GROWTH