Friday, May 22, 2009

Romania's Isarescu hopes for economic growth in '09

By Luiza Ilie and Radu Marinas

BUCHAREST, May 21 (Reuters) - Romania's central bank governor Mugur Isarescu said on Thursday he hoped the economy would show some growth this year, even after a deep contraction in the first quarter. 

Like many of its neighbours, Romania slid into recession this year as global financial turmoil struck manufacturing and thinned down consumption, but economists said the full impact of economic troubles has yet to hit many Romanians.

The unemployment rate has risen to more than 5 percent from less than 4 percent last year and government officials expect it to rise further to some 7 percent by the end of the year.

However, Isarescu said with foreign capital increasingly available again in Romania -- the country secured a 20 billion euro aid package through the International Monetary Fund in March -- economic prospects could be improving.

"My hope is that there will be an improvement in the economy, not a fast one, and towards the end of the year, when we calculate the whole of 2009 versus 2008 the figure will be positive (growth)," Isarescu said at a financial seminar.

He added that the central bank's baseline scenario still envisaged a full-year contraction of 4 percent.
While Isarescu has persistently painted an optimistic picture of Romania's crisis-stricken economy this year, many analysts are revising their forecasts after data showed the economy shrank by 6.4 percent on the year in the first quarter.

"I think the governor is probably insisting on growth to ... influence the expectations of investors and to restore their trust in the Romanian economy," said ING Bank senior economist Nicolaie Alexandru-Chidesciuc.
"But he risks losing credibility if it doesn't happen."

Earlier, an adviser to Isarescu said the European Union state's sharp economic contraction will continue in the second quarter, before moderating slightly later this year, as the impact of the financial crisis on domestic demand deepens.

"(Economic contraction) will be significant once more (in Q2) and then improve towards the end of the year," Lucian Croitoru told reporters. "Romanians are only just beginning to understand there is a recession and ... cut spending."

Croitoru reiterated expectations of a 4 percent contraction in all of 2009.
However, some analysts say any gradual improvement in the economy may occur later than Croitoru suggested, largely because poor weather conditions, including a drought, may slash farming output and increase economic pain later this year.

"We see things worsening in Q2 and Q3 and an improvement only in Q4," Chidesciuc said.
"But there is the risk of a weak agricultural year. If this materialises, the negative impact will be substantial and it is possible that the GDP will continue to drop. We are not ruling out a contraction of 10 percent (year-on-year) in Q2 or Q3."

Both central bank officials said on Thursday that currency depreciation has already peaked in the first quarter and that the exchange rate has stabilised, having a diminished impact on inflation from now on.
"Inflation is going to come down (this year) because the recession is pulling it down. We won't be having any more (currency) depreciation," Croitoru said.

A weak currency has been a key factor behind the Romanian central bank's cautious approach to easing borrowing costs in recent months to help the economy. Combining with persistent domestic consumption it had kept inflation high.

The bank cut its benchmark rate by a half point to 9.50 percent in May but said any room for further easing was limited.

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