“Pre-election spending should partially mitigate the 1Q12-2Q12 recession that is likely to be triggered by the drop in the euro zone gross domestic product, but this growth boost will be limited as the executive consistently talks of sticking to the fiscal correction line,” ING said in its Emerging Europe 2012 outlook.
It said Romania’s high share of foreign currency debt puts the country in one of the worst positions in the region, as net external liabilities exceed 60% of GDP. Moreover, the eastern European country has strong financial ties to Greece, of about 16% of GDP, making it vulnerable to potential spillovers.
“This external picture, the weak recovery backdrop and stress in external funding markets hint the leu is set to weaken,” the report noted.
However, the central bank is unlikely to allow the leu to weaken too much against the euro, ING analysts said.
The bank estimates the leu could fall past 4.5 per euro in 2012, should external pressure intensify.
Standard & Poor’s Friday cut its ratings on 9 euro zone states, including triple A economies France and Austria.
The likely recession in the euro zone in 2012 is bound to take its toll on the Romanian economy as well, due to falling demand for exports, but increased public spending ahead of the November elections will partly mitigate its effects.
ING estimates Romanian economy will slow its advance to 0.8% in 2012, from a growth of over 3% predicted for last year.
External shocks are likely to induce a mild contraction in the Romanian industry, while private consumption should remain resilient throughout 2012 as well, the report noted.
Inflation could decelerate to an annual rate of 2% in the second quarter, allowing the central bank to further lower its rates, “possibly taking the key rate to 5.5% as it showed it pays closer attention to internal dynamics than the brewing external stress,” ING said.
The annual rate is likely to jump up toward 4.2% in the second half of the year, pushed by higher volatile prices and a rather weak farming year.
Unemployment is estimated to increase further in 2012, which will affect the banking market as non-performing loans are likely to grow.
“The withdrawal of external financing looks like the most worrying near-term threat, especially since the share of external liabilities in the banking system is larger than in the other EU states in the region,” ING said.