” Despite healthy growth in the first semester of 2012, of 0.8% year-to-year, Romania’s GDP could contract by 0.5% year-to-year in the third quarter due to poor crops and public investment cuts (-39% in June and July 2012) in order to meet the 2012 budget deficit target of 2.2% of GDP. Hence, only a recovery of foreign demand will prevent Romania from re-entering technical recession by the end of the year,” Gillian Edgeworth, Chief Economist with UniCredit Bank London for Eastern Europe, Middle East and Africa said in a survey Tuesday.
UniCredit forecasts an economic growth of about 0.5% for Romania in 2012.
GDP growth could pick up gradually in 2013 and 2014 to 1.3% and 1.6% respectively, in line with a mild recovery of economic activity in the euro area, while the Romanian economic dynamics is seen remaining too slow “to resume real convergence” to Western Europe, the survey also read.
Romanian economy is expected to remain below-potential growth until the end of 2014, slowed down by poor demand from the eurozone (e.n. for exports) and low fund inflows.
Despite the Romanian leu losing approximately 5% against the euro and 18% versus the US dollar over the past 12 months, this didn’t boost exports, dependent mainly on demand, the survey also read.
Beside poor inflows, Romania faces repayments to the IMF of EUR1 billion until the end of 2012, EUR 5.3 billion in 2013 and EUR4.9 billion in 2014, stressed out UniCredit.
Unicredit also emphasized that budget deficit targets are likely to be missed during the following years, despite fiscal consolidation.
“Public policies will have a major impact on growth dynamics as the complete reversion of the public sector wage cuts of 2010 and refunds to pensioners will further squeeze investment and co-financing for EU funds,” according to UniCredit economists.
Thus, budget deficit could fall to 3% of GDP in 2012, and remain above 2% in 2013 and 2014, missing deficit targets. Also, a stronger correction below 2% of GDP “would entail an unlikely improvement in tax collection or higher taxes.”
Thus, in order “to avert the rapid depletion of its reserves,” currently amounting to EUR3.2 billion, the Government will have to step up issuance. The Finance Ministry could try tapping again foreign markets for a similar EUR750 billion volume before the end of 2012, according to UniCredit.
According to UniCredit, Government’s “outflows to the IMF are unlikely to be financed entirely on foreign markets, subtracting at least EUR2 billion and EUR1.5 billion from forex reserves in 2013 and 2014 respectively.”
UniCredit also forecasts the current governing coalition, USL, is likely to remain in power after parliamentary elections December 9, stressing upon the different views of the coalition members as regards the fiscal policy.
“Within the USL, the views on taxation are very different, with the social-democrats (PSD) favouring progressive tax rates on wages and the liberals (PNL) preferring the current flat tax of 16% (…)Hence, the next budget will be the first real test for the governing coalition,” according to UniCredit analysts.