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Viewpoint: …for something to be credible, it must be true, by Lucian Anghel, BCR Chief Economist

After an exceptional 2008, during which Romania grew by a staggering 7.1%, the shock wave from the downturn in the Eurozone began to be felt increasingly strongly - especially from 2Q09. Despite the progress made in the last few years, the restructuring process of the real economy is far from complete.

With local demand crushed by much scarcer liquidities than had been coming from abroad in the last few years and increased caution among both lenders and borrowers, Romania's economy is likely to contract more in 2009 than anyone had expected. The specter of dwindling income and higher unemployment is certainly a deterrent, while confidence indicators point to stabilization at low levels, at least in the short run.

Romania had been closer to an investment-driven economy, considering the strong investment rates in recent years, greatly underpinned by external resources, which played an increasing role in driving the economy upward at overheating rates. The local economy grew 3.5 times faster than the Eurozone average in the last five years, while hefty FDI inflows proved very useful in paving the way to a more efficient and flexible economy - able to respond better to both domestic and foreign demand.

Economic expansion was also largely sustained by too vigorous consumption, boosted by highly uncorrelated with economic realities of wage growth especially in the public sector (21 higher than the private sector average) and increasing number of public employees by around 200 thousand people pushed consumption beyond safety limits. Thus, too fast income growth rates and a wide range of loan-based products, amid tightening competition in the banking market also swelled consumption, while domestic supply fell behind significantly. Actually, real economy could hardly keep up the pace, with the local banking sector dominated by major foreign banks. There has been a clear discrepancy between the "ready to lend" approach of banks - before the start of the crisis - and the limited absorption capacity of the Romanian economy, which has also been reflected by the very low EU fund absorption rate.

Romania is currently falling faster than its CEE peers - EU members - on an annual basis, under the strong downward correction of its sizable current account deficit and much lower domestic demand, while lending has lost considerable momentum, despite monetary policy relaxation. Real GDP sank by an estimated 8.8% y/y in 2Q09 and 7.6% y/y in 1H09, but the seasonally-adjusted terms show a moderation of the q/q economic contraction to -1.2% in April-June, from the -4.6% seen in January-March 2009.

If the signs of rebound in Eurozone, currently pretty dim, are likely to continue in the last two quarters of 2009, Romania might ride out of recession in 4Q09 in q/q terms. However, stronger negative magnitude of economic fall than Eurozone in y/y terms shows much lower resilience during crisis and very limited room of action from government due to highly pro-cyclical budget policy in the recent years. Household consumption was significantly affected by higher unemployment (some 170,000 new unemployed people in the last seven months), lower wages (the annual growth rate of nominal wages slowed down to 8.6% at the end of 2Q09, from 26.2% y/y in June 2008, and will enter negative territory by the end of the year) and weak lending activities.

The contribution of net exports to real GDP has remained in the positive zone, in line with a sharper decline in imports compared to exports. The automotive industry benefited from different government programs supporting the replacement of old cars in the EU in 2Q09, mainly in Germany. Actually, in the absence of such programs, the positive contribution of net exports would have become highly questionable and certainly the bottom out level of industry would have been lower than 10%. The support provided by the Eurozone was important in 1H09 and was also reflected by the increasing share of capital goods in total exports to more than 42%. Romania should press on with long delayed public reforms and this has become all the more important as IMF targets are under close surveillance of foreign investors and major international rating agencies. It is high time that the government overhauled public finances to make spending more transparent and ease the burden on the state budget. Additional requirements attached to the loan package along with the deficit increase include measures to strengthen fiscal discipline in local governments, decentralised entities and state-owned enterprises. EU membership and Eurozone (accounting 57% of the total exports) are particularly important for the future development of Romania, and Romania is still perceived as an investment hub in the region as long as in the first 6M09 FDIs inflows stood at almost €3bn which is the figure anticipated by most market analysts for the whole 2009. Romania cannot afford to be complacent now and it has to be aware that Euronezone's help is not enough. Keeping promises is far more important, while being credible during emotional times like these is crucial for the country's future. But how one once said " ...for something to be credible, it must be true".

Sursa: http://www.nineoclock.ro

Tags: economy while exports credible years eurozone romania euro bcr