Barclays sees risks of Romania overshooting the IMF’s budget targets later this year.
The hard landing scenario is materializing in the economy after previous boom years. Analysts have revised their GDP forecast down to a -6.3% y/y contraction in 2009 against the previous expectations for a milder -2.6% slowdown.
“We sees downside risks to our forecasts, as there are indications that this year’s harvest may be only half that of 2008”, Barclays said.
Barclays’s forecasts are similar to Raiffeisen’s projections that involves a 6% economic contraction in Romania this year, versus 4% in their previous estimates, in view of sharp decline in industrial production output and rising unemployment rates.
GDP contracted 6.2% y/y in Q1, dragged down by a 10.5% y/y plunge in household consumption and a 36.7% drop in gross capital formation.
Net wages growth moderated to 9.8% y/y in April from 17.6% in December, as the government froze public wages this year. The unemployment rate rose to 5.8% from 4.4% in the period.
“While depletion of inventories is to be blamed for such a large fall in investments, we believe the chances of a quick economic recovery are slim, given the restricted access to new capital,” Barclays says.
Credit to the private sector, which reached 40% of GDP, moderated sharply to about 4% in April from 64% a year ago and has even started declining on m/m basis of late. “Given that the credit expansion in previous years was mostly financed by external sources, we expect credit growth to moderate further over 2009 and the government’s First Home program is likely to have little effect”.
NBR’s deputy governor, ready for a severe decline
The economic contraction projection of 4% remains feasible, according to the deputy governor of National Bank of Romania, Cristian Popa, who doesn’t exclude the likelihood of Romania being at risk of a greater GDP contrction, in view of below-expectation economic evolution.
Sharp growth deterioration is likely to put further pressure on the 2009 budget outlook
The IMF program foresees the cash budget deficit at 4.6% of GDP (5.1% ESA-95) this year, and Barclays sees risks of a larger gap at 5.4%. ”We believe the government is likely to fulfil the end-June target of 2.7% of GDP gap, but the budget revisions may be needed in August-September. That said, it is likely to be difficult to reduce expenditures head of the November presidential elections”, Barclays says.
The large negative output gap is likely to keep inflationary pressures at bay unless significantly more RON depreciation occurs.
“We look for CPI inflation to moderate to 5.5% y/y in December from 6.0% in May. GDP contraction and disinflation are likely to elicit further interest rate cuts, in our view, and we expect a total of 125bp in cuts from the current 9.50% by end-Q3”.
However, the central bank is likely to proceed cautiously with monetary easing in a bid to decrease risks of RON depreciation. The progress with the IMF program is likely to be key for this.
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