The 2013 growth forecast was also reduced to 1.7%, from 2.3% initially.
“The biggest threat to Romania’s economy comes from economic and financial woes in the euro area,” UniCredit said in its latest CEE quarterly report.
The Italian lender noted Romanian economy had a bad start in 2012, contracting 0.1% quarter-on-quarter in January through March. The first-quarter evolution was negatively affected by a string of negative events, including Nokia’s decision to close down its cell-phone factory in Jucu, the poor economic performance in the eurozone and a severe winter.
“Output in industry was the most affected, with the sector slumping to -0.4% year-on-year versus our initial forecast of 1.3% growth. While February weather prompted a strong increase in the production of energy, manufacturing contracted for the first time since the 2009 recession,” UniCredit said.
Romania has the second largest exposure to the Greek banking sector after Bulgaria and, in case of strong negative developments in the Hellenic nation, UniCredit estimates the deleveraging process will accelerate in Romania, albeit at a gradual pace.
“In more extreme scenarios both commercial banks and the Romanian central bank have experience in successfully managing deposit runs, though such an event would likely push interest rates higher and damage economic activity,” the report noted.
The bank expects Romanian budget deficit to narrow to around 3% of the gross domestic product in cash terms this year, from 4.1% of GDP in 2011. UniCredit’s estimation is below the government’s target of 2.2% of GDP.
“The official deficit target is already under threat, as the gap in the first four months reached 0.8% of GDP. In addition, the government is preparing to spend some 0.25% of GDP on returning the remainder of a 25% wage cut in the public sector and on giving back health contributions from pensions below RON740,” UniCredit said.
However, the deficit target could be reached by crowding out public investment, the bank noted.
“The most important focus is not the actual level of the deficit, but the structure of spending: if it reverts to favoring wages and social security over investment, Romania will achieve a stronger fiscal impulse in the short run, but will also boost imports and make tax hikes inevitable,” the report noted.