Wednesday, September 19, 2012

FT: Romania: doing OK but for how long?

September 18, 2012
by Kester Eddy

They may not be celebrating on the streets of Bacau or Brasov but Romania has been doing pretty well of late. GDP grew by 1.2 per cent year-on-year in the second quarter for a start.

More fundamentally, says IHS Global Insight, there has been progress on the fiscal deficit and the country’s trade deficit, which was about 11 per cent of GDP before the global recession but has since settled around 4 per cent of GDP. Based on that progress, the US-based information provider has just upgraded Romania’s short- and medium-term sovereign credit worthiness by one notch – bringing Romania’s medium-term rating up to investment grade.

The question is, will the good times last?

This year alone Romania has gone through three governments and has seen a public row erupt between prime minister Victor Ponta and Traian Bašescu, the largely ceremonial president. But Chuck Movit, IHS Global Insight’s economist for Romania is cautiously bullish.

Sure, he downplays his own upgrade, noting that both Fitch and Moody’s also rank Romania at minimum investment grade (only Standard & Poor’s has Romania at the highest junk levels). He also stresses the need to stick to the fiscal and monetary policy paths agreed with International Monetary Fund and European Union under the terms of a €20bn standby loan granted in 2009, and is not shy about problems at Romania’s banks, many of which made loans in foreign currencies before the crisis weakened the leu.

He writes:

Romania still scores risk due to the size of its external financing needs relative to its foreign-exchange earnings, as well as on the size of its banking sector’s liabilities to BIS [Bank of International Settlement]-area banks relative to assets vis-à-vis those banks.

But, in his assessment, crucially, the country “no longer scores risk” on its current-account balance.

Throughout the first seven months of 2012, Romania’s merchandise trade deficit has been essentially unchanged from a year earlier, despite a very negative external economic environment. Although merchandise exports only edged up year-on-year (y/y) during July, the trend in merchandise imports was very similar. In that period, improvements in balances on trade in factor and non-factor services and in net current transfers trimmed the current-account deficit by more than 35% compared with a year earlier.

We project the current-account deficit on average in 2012–2014 to average no more than 2.8 per cent of GDP. If we look at only the part of the current-account deficit that we do not anticipate to be financed by inflows of foreign direct investment, the projected ratio to GDP in 2012–14 on average shrinks to just -0.8 per cent.

Movit argues the future also looks positive. Strong foreign direct investment flows through much of the previous decade have helped improve competitiveness dramatically. Hence, provided western Europe returns to growth by 2013, demand for Romanian exports and incoming FDI will again be on the rise.

Not all are quite so sanguine, however.

Peter Attard Montalto of Nomura in London notes that Romania’s economy is healthier than those of its neighbours, typically suffering negative growth of about 1 per cent. That performance is especially creditable given recent austerity measures, political rifts and Romania’s exposure to the EU periphery.

But Montalto reckons a sharp downturn is inevitable before any modest improvements can be expected next year.

Critically, export growth has dropped to near zero, causing a slowdown in industrial production and exposing “a weaker underlying picture in the economy than the headline numbers suggest”.

Rather than investment kicking in and boosting exports, Montalto sees waning exports leading to reduced disposable income and domestic consumption, plus a downturn in investment.

Employment growth has already started to turn, but as inflation remains sticky given non-core pressures and wage growth also comes under more pressure in this environment, consumption could fall back. Investments should also start to slow from such a fast pace as we reach the end of the current EU funding window.

He says growth this year will be just 0.2 per cent and, even if the government eases the fiscal consolidation brake next year to provide some stimulus, this will “ultimately be unsustainable.” As a result, growth next year may only be 1.2 per cent, he writes.

That’s still not bad in the regional context, but it may still not feel like much for the many households struggling to survive in a Romania under austerity.

As the otherwise upbeat Movit puts it in one cautionary sentence:

Should the political tensions over austerity measures result in a dysfunctional government that is unable to continue to pursue these [consolidation] policies, our view of creditworthiness would suffer considerably.

In other words, Romania needs to hang on and hang in there, or all the good achieved thus far could yet come undone.

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