Romania Business Forecast Report Q3 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	59
ISBN Number	1745-0675
Product Code	BMI02154

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Summary

The 6.2% y-o-y contraction of real GDP in the first quarter of 2009 indicates the severity of the unfolding downturn. Taking into account both the poor Q109 data and a raft of negative leading indicators, we have revised down our real GDP projection for this year and now forecast a 5.7% contraction this year (compared to our earlier -4.1% growth projection). We believe that Romania's economic cycle is running approximately six months behind the eurozone and thus anticipate that the economy will reach the bottom of the trough in Q309, with some stabilisation of economic output expected in the final quarter of the year. As the country heads deeper into recession, we believe that political risks will concurrently rise, as is reflected in our short-term political risk rating, which stands at 58.3. We are concerned that an increase in strikes and public protests may lead to a softening of government reform policy, and may undermine the government's ability to implement core components of its programme.

Tensions between the two coalition partners, the Social Democrat Party (PSD) and the Democrat Liberal Party, will remain elevated. While a break-up of the coalition is not our core scenario at present, we caution that IMF conditionalities, which state that Romania must not run a budget deficit of more than 5.1% of GDP in 2009, may exacerbate friction between the governing parties.

We also stress that further cuts in government social spending plans are likely to be particularly unpopular with the centre-left PSD, and that the party may choose to leave the governing coalition rather than introduce further spending cuts which would likely damage its popularity. In addition, the upcoming presidential election could encourage divisions to develop between the two parties, as both appeal to different groups in society.

While we believe the outlook for the Romanian economy in 2009 through to mid-2010 is bleak, we expect signs of a recovery in the latter months of the 2010, and target a 0.3% expansion in real GDP in that year. Beyond 2010, we anticipate that economic output will expand on average by 3.4% through 2011-2013. However, the growth rate for this period is lower than the 7.1% average seen between 2006-2008, as we do not expect access to foreign capital, which has been key to robust growth in recent years, to return to pre-crisis levels. Furthermore, while we are likely to see an improvement in domestic and external demand in 2011, it is not expected to return to previous levels.

Romania's transport and infrastructure minister, Radu Berceanu, stated on May 6 that the privatisation of railway freight company CFR Marfa will take place when the effects of the financial turmoil have mitigated. The negative impact of the global recession on the company is seen from the substantial RON14mn (US$5.71mn) loss registered in February 2009. CFR Marfa was created in 1998 following the re-organisation of Romanian Railways (SNCFR) and given responsibility for freight transport. The state-run company utilises the SNCFR's infrastructure and operates a fleet of 926 locomotives, 60,000 trucks and two ferryboats of 12,000 deadweight tonnes (DWT) each.

Going forward, BMI believes the privatisation will introduce higher levels of competition into Romania's freight rail markets. Moreover, it will offer major opportunities in terms of raising economic productivity, as well as creating demand for new infrastructure, goods and services.

Content

Executive Summary
Elevated Political Tensions
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Political Outlook
- Elevated Risks to Stability of Governing Coalition
- despite The High Levels of Support for Both The Governing Coalition Parties in The European Parliamentary Elections, We Hold to Our Core View That There Will Be High Risks to Coalition Cohesion through The Medium Term.
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- Trend Growth Will Be Lower
- following The Sharp 6.2% Y-O-Y Contraction in Romanian Real Gdp in The First Quarter of 2009, We Have Revised down Our 2009 Growth Forecast and Now Project A 5.7% Economic Contraction.
- Balance of Payments
- Current Account Deficit Will Fall to 4.6% of Gdp in 2009
- We Forecast Romania's Current Account Deficit to Narrow to 4.6% of Gdp in 2009 (from 12.2% in 2008).
- Monetary Policy
- Rate Cutting Cycle to Continue
- following The National Bank of Romania (Nbr)'S Decision to Lower The Key Monetary Policy Rate to 9.50% on May 6, We Hold to Our View That Further Interest Rate Cuts Lie Ahead, and Expect Rates to Fall to 7.00% by End-2009.
- Exchange Rate Policy
- Leu Risks Are Weighted towards Depreciation
- While The Romanian Leu Has Remained Relatively Stable against The Euro since The Start of February, We Caution That The Medium-Term Risks to The Unit Remain Tilted towards Depreciation.
- Fiscal Policy
- Budget Deficit Will Reach 5.5% of Gdp in 2009
- While The Latest Data from The Romanian Ministry of Finance Indicates That The Government Is on Track to Meet Its Budget Deficit Target of 4.6% of Gdp (5.1% of Gdp under Eu Accounting Standards) This Year, We Caution That The Risks That The Government Will Exceed This Limit Is Elevated.
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 to A Forecast 3.4% between 2011-2013. Growth in The Country Will Continue to Outperform The Eurozone Average throughout The Period.
Chapter 4: Special Report
- The Outlook for Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Textiles and Clothing
- Executive Summary
- Romania Is A Small-Sized Textile and Clothing Producer, Which Uses Its Competitively-Priced Labour Force to Supply Mainly European Customers with A Manufacturing and Assembly Service Based around Cmt Operations.
- Shipping
- Executive Summary
- in 2009, Bmi Predicts That Throughput at Romanian Ports Will Decline, as The Global Downturn Hits The Country's Import and Exports Sectors. Using The Port of Constantza as The Bellwether, Bmi Analyses How The Downturn Will Play out in Romania's Maritime Sector.
Chapter 7: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: Political Overview
- Table: Economic Activity
- Table: Balance of Payments (Euro)
- Table: Monetary Policy
- Table: Fiscal Policy
- Table: Long -Term Macroeconomic Forecasts
- Table: Loan -to-Deposit Ratios, Selected States
- Table: Loan Growth (% Chg Y-O-Y), Selected States
- Table: Commercial Banking Business Environm Ent Ratings, Selected States
- Table: Bmi Business and Operational Risk Ratings
- Table: Bmi Legal Framework Ratings
- Table: Labour Force Quality
- Table : Europe , Fdi Annual Inflows
- Table: Top Export Dest Inations
- Table: Textiles & Clothing Production & International Trade, 2006-2013
- Table: Major Port Data
- Table: Glo Bal Assumptions
- Table: Glo Bal & Regional Real Gdp Gro Wth
- Table: Commodities