Wednesday, April 6, 2011

Romania: Grounds for optimism

Oxford Business Group Latest Brief

Romania’s economy is set to return to growth this year, albeit tentatively, after two years of recession. While the heady days of the last decade are still some way off, the improvement is based on the sound foundations of export-led industrial recovery and healthymacroeconomic indicators.

Mugur Isarescu, the widely respected governor of the Romanian National Bank, said that the economy has pulled out of its long, deep recession and is entering a new phase of growth. He added that he expects growth to be sustainable and partly export-driven, whereas a substantial contributor to Romania’s bumper years in the last decade was a construction boom that subsequently turned to bust. Politically driven increases in public sector wages are also likely to have helped stimulate growth, but they also drove up the public deficit and inflation to unsustainable levels, particularly as the global economic climate worsened.

Having been one of the fastest-growing economies in Europe in the mid-2000s, clocking up GDP growth of 6.3% in 2007 and 7.3% in 2008, the global economic crisis exposed Romania’s structural weaknesses and imbalances. The recession of 2009 saw the economy shrink by 7.1%, a more extreme reversal than those seen in most other European countries. Even as the world pulled out of the crisis last year, with most European economies registering growth, Romania experienced a continued shrinkage of 1.9%. Investors have been wary, with the real estate market no longer seen as a sure-fire bet and the currency, the leu, somewhat volatile.

The gloom is far from entirely banished. Isarescu and the IMF alike forecast growth of 1.5% for 2011, a sluggish rate compared to previous standards, while the Vienna Institute for International Economic Studiesexpects 2%. While there are positive signs, it will be some time before the economy reaches pre-crisis levels. Romania remains vulnerable to any further global slowdown, which could constrict investment again and damage exports.

Furthermore, inflation, a bugbear for some years, is likely to remain rather high, despite low growth, leading to stagflation. Nicolae Chidesciuc, chief economist at ING Bank Romania, the local branch of Dutch financial institution ING, expects a rate of 5% in 2011 and 4.5% in 2012, while the IMF forecasts 5.2%. Inflation at this rate is likely to erode many Romanians’ wages, limiting their spending power, and have an effect on producers through higher input prices.

Nonetheless, the governor has sound reasons for optimism, with signs that Romania’s recovery will indeed be based on stronger foundations. Despite the recession, Romania has managed to cut its external debt to 5%, down from 12-14% in 2008 and 2009, according to Isarescu, who says that the country will now aim to keep it around 4-6%, a level he sees as sustainable. This makes Romania considerably more secure than many of its Eastern European neighbours that are saddled with expensive debt that weighs on national finances.

Industry – much of it export-oriented – has also recovered faster than the economy as a whole. Industrial output grew by 4.1% in 2010, having shrunk by 5.7% in 2009, and in January production grew 10.6% year-on-year, accelerating for the third consecutive month, with this the fastest rate since April 2008.

Isarescu has pointed out that Romania needs not only investment but entrepreneurs with the skills to develop ideas and see projects through. He sees non-completion of new schemes as one of the main problems for the economy, and indeed many poorly conceived projects (including some funded by the EU).

Romania has a substantial pool of skilled labour and recent years have seen many Romanians who were educated or employed abroad return, applying their skills in their home country. More start-ups and dynamic local firms could potentially bring great benefits to the economy, increasing competition and helping other firms enhance their operations, leading to gains in productivity, which remains low by European standards.

The green shoots have started to appear for Romania. While it still faces challenges, the country’s export-led industrial recovery and strengthening macroeconomic fundamentals have translated into an opportunity to nurture more sustainable long-term growth in 2011 and beyond.

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