Thursday, October 25, 2012

FT: Romania: high marks from the IMF

Romania: pulling out of a serious crisis fairly successfully, but with a long way to go to attain rude economic health. That’s the International Monetary Fund’s conclusion following its latest staff visit to the country.

“Following the severe downturn in 2008–09, the Romanian economy has undertaken a large adjustment to restore macroeconomic stability,” the statement said in its opening line.

After pausing briefly to praise its own role in supporting recovery through stand-by arrangements – as well as that of the EU and World Bank, the Fund continued:

Sustained fiscal consolidation, mainly achieved through spending constraints of the wage bill and public pensions, has resulted in a significant reduction of the fiscal deficit. Growth resumed in 2011 and annual inflation has declined to record lows earlier this year. Unemployment remains high, but labour market reforms have contributed to a better-functioning labour market and a recovery in employment.

The IMF appears particularly pleased with Romania’s fiscal tightening, which is partly linked to the Fund’s standby packages. The Fund expects that the government can meet its target of keeping the deficit within 2.2 per cent of GDP this year, despite the appeal of loosening in the run-up to the general election slated for December 9.

The country’s tough austerity programme brought protestors to the streets earlier this year, and led to the toppling of the previous centre-right government.

Having followed a pro-cyclical loose fiscal policy in the boom years of the last decade, Romania is now locked into a similarly pro-cyclical process of cuts and tax rises at a time when the eurozone crisis is casting a long shadow over the economy, and the effects of the country’s own crunch in 2009 are still feeding through.

The “social-liberal” government of Prime Minister Victor Ponta may feel that it has enough of a cushion in the polls to allow it to please the IMF rather than Ponta’s socialist vote base.

The IMF also has plenty of caveats: as it states, “the post-crisis recovery remains fragile and the outlook is challenging”. It forecasts only 0.9 per cent growth for this year, and 2.5 per cent in 2013 – not bad by EU standards, perhaps, but low for an emerging market which is one of the EU’s poorest countries.

And as usual, the Fund also urged “accelerating the pace of structural reforms”, particularly in labour markets, and pushing forward privatisation, a process that has been wrought with difficulties and controversy for the past two decades. There was also a warning about possible relapses into political turmoil, following the fall of two governments, the attempt to impeach President Traian Basescu and some controversial constitutional reforms by Ponta’s government

Dumitru Dulgheru, head of fixed income research at BCR, Romania’s largest bank, argues that, fundamentally, Romania suffers from its economy having both the characteristics of an emerging market (structural weaknesses, patchy infrastructure, concerns about corruption), and the problems of being linked to the crisis-hit eurozone, which accounts for more than 50 per cent of exports and 80 per cent of FDI.

Dulgheru and BCR think the IMF’s forecasts on the optimistic side, and expect 0.7 per cent growth this year and 1.9 per cent next. Dulgerhu is also sceptical about whether the government will keep the deficit within target range, and warns that the IMF may be too incautious about inflationary pressures. He says that risks to growth “are on the downside”.

“My view is that Romania will be inching forwards with moderate growth,” Dulgheru says, with performance closely linked to the eurozone.

As a report by Moody’s published last week noted, Romania has a diversified economy with good potential for long-term increases in incomes and competitiveness. The country is far from out of the woods yet, and the IMF’s praise will come as cold comfort to Romanians who have seen their wages and living standards fall under austerity. But Romania has reason to be hopeful.

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