Romanias return to growth since 2011 has so far been driven primarily by export demand. As the eurozone sovereign debt crisis weighs heavily on this previous growth driver, we expect domestic economic activity to cool despite looser fiscal policy following two years of severe IMF-led fiscal austerity. We forecast 2012 headline growth of 1.0%, compared with 2.5% growth in 2011. We forecast Romanias current account deficit to widen to 4.7% of GDP in 2012, from an estimated 4.2% in 2011, as external demand for the countrys exports cools. That said, we expect continued improvement in investor confidence, and our previous expectation that Romanias narrowing financial and capital account surplus would be unable to finance a widening current account deficit in 2012 no longer holds.
Major Forecast Changes
We have revised down our forecasts for Romanian real GDP growth in 2012 and 2013, to 1.0% and 2.1% respectively, from previous forecasts of 2.5% and 2.9%. Our significantly weaker outlook for the global economy, combined with the countrys high exposure to peripheral eurozone banks, is set to drag headline growth lower. We have modestly revised our forecast for Romanias 2012 budget deficit to 3.2% of GDP, from 3.0% previously. Weaker economic growth and a renewed bout of investor risk aversion that will delay the IMF-led privatisation agenda will weigh on government revenue.
However, cross-party commitment to the countrys IMF Stand-By Arrangement, and future spending restraints, mean we expect the budget deficit to remain within the EU-defined 3.0% of GDP limit from 2013 onwards. We have revised our average 2012 and 2013 leu exchange rate forecasts to RON4.4200/EUR and RON4.4500/EUR respectively, from RON4.3900/EUR and RON4.4000/EUR previously. Although our fundamental view for the unit to remain relatively stable in the medium term remains unchanged, the leus recent weakness indicates that the currency is set to trade within a higher range than we previously expected.
Risks To Outlook
Downside Risk To Growth Forecast: The eurozone sovereign debt crisis presents a substantial risk to global and thereby Romanian economic growth. Although our core scenario is for policymakers to reluctantly take the action necessary to contain the crisis, there is still a risk of a disorderly outcome, potentially catalysing a renewed global downturn. Romania would be extremely vulnerable under such a scenario.
Table of Contents
Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1:Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
USL To Win Election, Policy Continuity Ahead
We expect Romanias interim Social-Liberal Union (USL) coalition government to win upcoming parliamentary elections in November
The USL will remain committed to the terms of Romanias IMF Stand-By Arrangement, although we expect some re-negotiations to take
place Continued IMF-led reforms will likely cost the USL in popularity in the coming months, and we believe that significant challenges
to Romanias economy could test the USLs cohesion
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
EU Membership Underpins Long-Term Stability
The strength and quality of Romanias political institutions falls short relative to much of Europe, with significant challenges ahead
despite the progress made in the two decades since the fall of communism However, we believe that Romanias membership of the EU
will spur gradual political development over the years ahead and is very supportive of long-term political stability
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Weak Growth Outlook At Serious Risk
We have revised down our forecasts for Romanian real GDP growth in 2012 and 2013 We now expect growth of 1 0% and 2 1% in
2012 and 2013 respectively, from a previous forecast of 1 4% and 2 3% growth Renewed uncertainty over the future of the eurozone
will weigh on Romanias trade and investment flows, while the domestic banking sectors exposure to deleveraging Western European
parent banks is set to limit credit availability and weigh on headline growth
TABLE: ECONOMIC ACTIVITY
Monetary Policy
Monetary Authorities To Prioritise Financial Stability
The National Bank of Romania (NBR) has reached the end of its cutting cycle and we forecast consumer price inflation at 3 3% by
end-2012 Despite limited inflationary pressure and a weak growth outlook, we anticipate the NBR will hold its benchmark policy rate at
5 25% throughout 2012 to avoid exacerbating depreciatory pressure on the Romanian leu, and instead look for alternative ways to boost
liquidity in the economy
TABLE: MONETARY POLICY
Fiscal Policy
Modest Deficit Revision Does Not Change Outlook
We have modestly revised Romanias 2012 budget deficit to 3 2% of GDP, from 3 0% previously Weaker economic growth, and a
renewed bout of investor risk aversion that will delay the IMF-led privatisation agenda, will weigh on government revenue However,
cross-party commitment to the countrys IMF Stand-By Arrangement, and future spending restraint, mean we expect the budget deficit
to remain within the EU-defined 3 0% of GDP limit from 2013 onwards
TABLE: FISCAL POLICY
Balance Of Payments
Stable External Accounts, But Risks Remain
We have modestly revised Romanias 2012 current account deficit to 4 7% of GDP, from a previous forecast of 4 6%, as weak external
demand continues to weigh on the trade balance
TABLE: CURRENT ACCOUNT
Currency Forecast
RON: In A New Trading Range
Having broken through key support at RON4 4000/EUR on April 27 following the ousting of the government in a no-confidence vote,
the Romanian leu has borne the brunt of investor risk aversion in recent weeks (see our online service, May 3, Asset Class Strategy:
Assessing Political Turmoil)
Chapter 3: 10-Year Forecast
The Romanian Economy To 2021
Despite taking a heavy blow in 2009 on the back of the global economic downturn, we believe that the outlook for the Romanian
economy remains fairly bright over the longer term In particular, we cite the limited private sector debt burden, flexible exchange rate
and large consumer market as reasons underpinning our favourable assessment We caution, however, that ongoing political fragility,
corruption, population decline and the eventual adoption of the euro, could pose significant impediments to growth going forward
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Regional Business Environment Outlook
Emerging Europe Business Environment Update
BUSINESS ENVIRONMENT RATINGS
Romania Business Environment Business Environment
Institutions
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
TABLE: BMI LEGAL FRAMEWORK RATING
Infrastructure
TABLE: LABOUR FORCE QUALITY
TABLE: EMERGING EUROPE – ANNUAL FDI INFLOWS
TABLE: TRADE AND INVESTMENT RATINGS
Operational Risk
TABLE: TOP EXPORT DESTINATIONS
Chapter 5: Key Sectors
Defence & Security
TABLE: ROMANIAS MANPOWER AVAILABLE FOR MILITARY SERVICES, 2009-2016 (AGED 16-49, UNLESS OTHERWISE STATED)
TABLE: ROMANIAS DEFENCE EXPENDITURE, 2009-2016
Freight Transport
TABLE: AIR FREIGHT, 2007-2016
TABLE: MARITIME FREIGHT – PORT OF CONSTANTZA, 2007-2016 (000 TONNES)
TABLE: RAIL FREIGHT, 2007-2016
TABLE: ROAD FREIGHT, 2007-2016
TABLE: INLAND WATERWAY FREIGHT, 2007-2016
Other Key Sectors
TABLE: AUTOS SECTOR KEY INDICATORS
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS
TABLE: OIL AND GAS SECTOR KEY INDICATORS
TABLE: PHARMA SECTOR KEY INDICATORS
TABLE:TELECOMS SECTOR KEY INDICATORS
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS
Chapter 6: BMI Global Assumptions
Global Outlook
World Slows As Euro Crisis Simmers
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 53
