05/10/09

Romanian Economy Might Have Hit the Bottom, but the Government is in Crisis

There were some signs that the Romanian economy has finally reached the bottom of the recession, but the majority of the news was still very negative. According to GfK Romania the durable consumer goods market fell by 40.4% in the first half of the year. The number of bad loan payers with loans overdue by more than 30 days exceeded 600,000 in June, and in the January-July period, overdue loans increased by 82.8% compared to the end of 2008. In the business world, according to the European Commission, the economic mood continued to deteriorate, contrary to the EU average. The main ratings agencies on the heels of the IMF agreement all revised their forecasts downward, bringing them more or less in line with it. Investments also continued to suffer, as they dropped by 16.7% in Q1 y-o-y, followed by an even larger contraction of 29% in Q2, but the steepest fall was witnessed in the amount of FDI. In the first 7 months they fell by 48% y-o-y, and the only positive note of this news is that it could cover the current account deficit. On the other hand, the budget deficit continued to rise and by August it topped 4.5%, which is almost the same level as the previous target for 2009. The level of public debt has risen more than 6% since December 2008, reaching 28%. A more positive development was the announcement of the IMF. It finished the first review under the Stand-By Arrangement and approved a EUR 1.85 billion disbursement. Also, the National Bank of Romania cut its key interest rate by 50 basis points to 8%.

Analysis and forecast: inreasing risk

Politicians tried to strike a positive but realistic note, as more and more analysts sounded the opinion that the Romanian economy hit the bottom in Q2. However, the developing trends suggest that Q3 three is more likely to be the lowest point. The divided government, plagued with constant conflicts that resulted in the break-up of the big coalition (see next item), is not seen to be well suited to handle the challenges posed by the crisis. This was mirrored in the study prepared by CESifo, which aggregated the opinions of 12 Romanian economists. On a scale of 1 to 5, where 1 is the worst, the crisis-fighting measures of the government were evaluated at 1.3, which is the second worst classification in Europe after Latvia’s. The government’s image in the eyes of the population was continuously suffering from the endless brawls between the coalition partners. According to a CURS survey, 76% of Romanians think that things are going in the wrong direction, and according to Metro Media Transilvania (MMT) more than 40% think that this government will not succeed in battling the crisis. It seems that the statements of officials are only for foreign observers. While they contain sober and realistic economic figures, politicians fail to turn the projected determination into measures with potentially substantial results. What’s more, the new government is threatened with strikes and demonstrations by teachers and healthcare workers, members of the judiciary, the police and fire departments, further diminishing the chance of implementing important steps. Additional monetary easing depends on stability; as domestic political uncertainties may temper future cuts in the coming months.