Wednesday, March 4, 2009

Romania's economic growth sank threefold to 2.9 percent on the year in the fourth quarter of 2008

BUCHAREST, March 4 (Reuters) - Romania's economic growth sank threefold to 2.9 percent on the year in the fourth quarter of 2008 as the global crisis deflated consumption and industry, raising the need for foreign rescue aid.

Data showed on Wednesday that consumption, the main driver of Romania's buoyant expansion in recent years, fell 2.8 percent on the year in Q4 after growing 13.8 percent in Q3 as consumers and companies struggled to finance spending.

Industry was down 7.7 percent, depressed by tumbling demand from the euro zone that has bitten into central and eastern economies in recent months, forcing many manufacturers to halt production temporarily and lay off workers.

Still, the Romanian economy was probably the fastest-growing in the European Union last year, expanding 7.1 percent in a legacy of a national spending spree that has bloated its external imbalances and exposed it to a potential payments crisis.

Romania has already began talks with the European Union and the International Monetary Fund on a potential rescue package to help finance its double-digit current account deficit and shore up jittery markets.

The concern is that the central bank's hard currency reserves and credit lines to the public sector may not be enough to finance the external deficit and keep the economy afloat.

"It is clear that we have to plug the financing (gap) so that this correction, the deceleration of growth, will not push Romania into recession," said Rozalia Pal from UniCredit Tiriac.

Details about any potential rescue package are scant but Finance Minister Gheorghe Pogea has put Romania's financing needs this year at up to 10 billion euros.

Pogea also said he was concerned about the growth data, saying it undershot his expectations of a 7.8 percent expansion.

"This shows the impact of the crisis," he told reporters.
Analysts surveyed by Reuters expected Romanian GDP to grow 3.5 percent in the fourth quarter and by 7.3 percent in 2008. In the July-September period, GDP growth was 9.2 percent.

Economists now expect the Romanian economy to expand by less than 1 percent in 2009 with many pointing to a likely contraction. A Reuters poll conducted in the last week showed most expecting the economy to shrink in Q1.

Elsewhere in the region, recessionary tendencies are also spreading as eastern Europe is fast succumbing to global woes.

The Hungarian economy is expected to shrink by 3.5 percent this year, according to its central bank, after GDP contracted by 2 percent in the fourth quarter.

Many economists also expect contraction in the Czech Republic after it grew 1 percent on an annual basis in the fourth quarter.

The region's central banks now face a policy dilemma because grim forecasts are depressing local currencies and raising concerns over inflation, which makes it harder to ease the cost of credit to help the private sector.

In Romania, analysts said the central bank was likely to pay close attention to currency developments after the leu hit record lows against the euro in January.

"They will not have an impact on interest rates. The pressures on rates will come more likely from the exchange rate, and not from falling economic activity," said Ionut Dumitru from Raiffeisen bank in Bucharest.

Romania's main interest rate stands at 10 percent after a quarter point cut earlier this year, the first one in a year and a half. (Reporting by Radu Marinas and Justyna Pawlak; editing by Andy Bruce)

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