Monday, December 14, 2009

Romania's economy shows modest recovery despite continued suspension of IMF funds

December 13, 2009


Romania's economy has shown signs of a gradual recovery with good industrial production performance and a slight increase in exports in October, but political uncertainty has undermined the stability of the local currency and injected inflationary pressure.

INDUSTRY BOLSTERED BY FOREIGN ORDERS

Romania's industrial production grew 0.2 percent in October compared with September, while the annual decline moderated further to -1.5 percent, driven by good performance of capital goods and the current use goods industries and by a growing demandfrom Western Europe.

"The industry started to recover and there are clear signals that the decline halted. The main part of Romania's exports came from manufacturing industry and there are positive signals in Western economies," Lucian Croitoru, adviser to the central bank's governor, told Xinhua.

With economic activity picking up in Romania's main trading partners, the performance of the industrial sector is likely to continue improving, added Nicolaie Alexandru Chdesciuc, senior economist at ING Bank Romania.

However, he warned that "political tension may weigh on funding costs, providing a risk to this view along with the end of the car stimulus schemes in key trading partners."

Trade balance data mirrored the progress in industrial production as exports increased by 4.3 percent in October on a monthly basis.

"The EU consolidated its share in Romania's foreign trade to 75percent of total exports and 73 percent of total imports, pointing to the important role played by a gradual economic recovery of the major European markets in Romania's 2010 economic growth," noted Chdesciuc.

IMF POSTPONES 1.5 BILLION-EURO LOAN TRANCHE

However, the economy is still under great pressure as the International Monetary Fund (IMF) suspended the review of Romania's 20-billion-euro rescue package early in November, postponing a highly needed 1.5-billion-euro loan tranche, when the Finance Ministry is looking for funds to finance its massive fiscal deficit.

IMF halted the review when the Romanian authorities failed to present a promised budget plan for 2010, due to a collapse of government led by Emil Boc. But The IMF left the door open, saying that "the program remains ongoing" and promised that discussions will continue when the political situation clears up.

Analysts are worried that IMF disbursements will be further delayed if the political uncertainty continues. "We expect the next tranche to be delivered in March 2010," said Chdesciuc.

Mihai Tanasescu, Romania's representative to the IMF, told Xinhua in a phone interview that a new mission will arrive in Bucharest to review the program in the second half of January.

"If things go well," he said, "the IMF board of directors may approve the disbursement of the third tranche at the end of January or in the first days of February."

But the Fund insists on an austerity budget for 2010 with a fiscal deficit limited to 5.9 percent of Romania's gross domestic product (GDP).

There are signals that the fiscal deficit will exceed the target approved by the aid agency. "The fiscal deficit may rise to7.6 percent of GDP, slightly higher than the target, but I think that the Fund will be comfortable with this level, as it seems that the finance minister has put a brake on expenditures," said Croitoru.

According to analysts, despite the political turmoil there is abroad agreement among the main parties on the 2010 budget.

"We don't foresee major problems on the IMF front provided that a more stable government is formed without long delays. The new government faces a challenging agenda to put back the EU-IMF supported program on track," said Ilker Domac, senior economist at Citi Bank.

Meanwhile, the Romanian stock market experienced the first bankruptcy of a listed company, the IT&C retailer Flamingo International, which filed for insolvency under the pressure of creditors. The company failed to comply with the terms negotiated with ING Bank for the payment of a 17.5 million Euro loan.

"Bankruptcies do not necessarily mean that things go bad in an economy. It happens in times of crises and we may see more as some companies try to postpone failures. We expect to see a higher unemployment rate next year," said Chdesciuc.

INFLATION, A NEGATIVE SURPRISE

The November inflation rate came as a negative surprise, as consumer prices remained under pressure from the labor market rigidities and from some imperfections in the consumer markets, noted Eugen Sinca, economist at Banca Comerciala Romana (BCR).

Monthly inflation was 0.7 percent, while the annual figure stood at 4.7 percent, above the central bank's target, beating analysts' expectation of 0.4 percent.

"Political crises caused the depreciation of the national currency and added inflationary pressures. We expected that and decided to leave the key interest rate unchanged at 8 percent," noted the adviser to the central bank's governor.

Analysts are also worried that the banks had taken a step back in lending in foreign currencies in October after the increases of previous months, partially due to the political tension which devaluated the national currency.

"The contraction in corporate deposits of foreign currencies suggests that the economic activity remains downbeat," noted Chdesciuc.

The high interest rates of local currency credit limited business opportunities and the state's need of money crowded the private sector out from the funding market.

In order to finance its huge deficit, the Finance Ministry tapped about 2.6 billion lei (605 million euros) through the sale of 1 year and 5 years papers in national currency and attracted about 2.2 billion euro from the local market in November.

Source: Xinhua

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