Romania Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	50
ISBN Number	1745-0675
Product Code	BMI01534

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Summary

Risks Abound

The outlook for the Romanian economy over the medium to long term continues to be positive and we forecast that growth will remain robust, averaging 5.1% through our five-year forecast period to 2012. However, we caution that Romania's current account deficit, forecast at 14.5% of GDP in 2008, will pose risks to macroeconomic stability. Amid the ongoing bout of global risk aversion which has particularly affected emerging Europe current account deficit countries, the potential for foreign capital inflows to subside may throw the sustainability of the external financing shortfall into question.

We anticipate that the recent reform to the electoral system and the merger of two pro-presidential parties could result in the consolidation of the political system over the medium-term. This would have a positive effect on policy stability going forward especially as the likelihood of having a majority government has substantially increased.

Inflation will remain a core risk for the Romanian economy in 2008 with the latest data showing price growth of 8.0% year-on-year (y-o-y) in February, up from 7.3% in January. Core factors behind the continued uptick in inflation include rampant domestic demand, rising food costs, leu weakness and an increase in energy prices - due to an average hike in gas prices of 8.5% for household consumers, introduced on February 1. We forecast that inflation will come in at 5.4% at the end of 2008, above the national Bank of romania's year-end inflation band target of 2.8-4.8%. We anticipate that this will be fuelled by wage growth, fiscal spending, historically high global energy prices and the threat of increased consumer spending.

Despite being a full EU member, Romania's level of institutional and infrastructural development is still in a nascent stage and on many indicators, the country is more akin to non-EU emerging Europe economies such as Turkey or Croatia. Indeed, Romania ranks lower than both Turkey and Croatia on key corruption indicators while its physical infrastructure is among the least developed in the EU. Efforts to improve the business environment are being pushed forward but we do not expect any fundamental transformation any time soon. Indeed, political wrangling in the lead up to parliamentary elections, due by November 28, is likely to impede the policy agenda this year.

Content

Executive Summary
- Risks Abound
Chapter 1: Political Outlook
- SWOT analysis
- BMI Political Risk Ratings
- Domestic Politics
- a majority Government is more Likely
- We anticipate that the recent reform to the electoral system and the merger of two pro-presidential parties could
- result in the consolidation of the political party system over the medium term.
Chapter 2: Economic outlook
- SWOT analysis
- BMI Economic Risk Ratings
- Economic activity
- Economic Growth To Remain Robust
- We forecast that robust Romanian economic growth outlook will remain, averaging 5.1% through our five-year
- forecast period to 2012.
- Balance of Payments
- Current account Threat To Remain
- We anticipate that Romania's current account deficit which jumped 66% y-o-y, to US$24.7bn in 2007, up from
- US$12.5bn in 2006 has peaked.
- Monetary Policy
- Further monetary Tightening ahead
- The National Bank of Romania raised its policy rate by 50bps to 9.50% on March 26.
- Exchange Rate Policy
- Significant Risks Ahead For The Romanian Leu
- We are bearish RON/EUR in the medium term due to Romania's high current account deficit, which is likely to add
- to investor risk aversion amid global financial markets volatility.
- Investment Climate
- Pension Reform To Lead To Investment Diversification
- We anticipate that the reform of the Romanian pension system will provide a significant boost to domestic capital
- markets and help to mitigate state spending over the long term.
Chapter 3: Special Report
- Looking Beyond 2008
- The Future of The World, in Three acts
- US: The Rebalancing act
- Unwinding The imbalances
- We believe that a substantial, multi-year shift in the US external accounts is under way.
- China: What if We're all Wrong?
- Our Core Scenario For China
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with our
- expectations of the continued success of the urbanisation process and export-driven growth model underpinning
- our assumptions.
- Japan: immigration Key To Long-Term Growth
- Demographic Woes Portend Long-Term Decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT analysis
- BMI Business Environment Risk Ratings
- Business Environment outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 5: Key Sectors
- Food and Drink
Executive Summary
- BMI forecasts that by 2012, MGR sector sales will reach US$6.4bn - representing a growth rate of 164.9%
- between 2007 and 2012.
- Autos
Executive Summary
- Romania became the EU's eighth-largest car market in 2007, with 315,621 passenger cars sold, up 23.1%
- year-on-year, putting it ahead of Poland.
List of Tables
- Table: Romania - Economic activity
- Table: Romania - Balance of Payments
- Table: Romania - monetary Policy
- Table: Romania - Exchange Rate Policy
- Table: BMI Business and operational Risk Ratings
- Table: BMI Legal Framework Ratings
- Table: Romania Annual Fdi Inflows
- Table: Top Export Destinations, US$mn
- Table: BMI Trade Ratings
- Table: Retail indicators
- Table: Romania autos Sector - Historical Data and Forecasts