BCR, the largest lender in Romania, reduced the growth estimate of the Romanian economy from 1.2 percent of GDP to 0.7 percent this year, and the analysts say the economy may underperform in the years to come if the absorption of EU funds doesn’t pick up.
Analysts at BCR slashed the growth forecast due to a lower than expected agricultural output and the adverse conditions on the external and internal markets. The recent political crisis is cited as a factor that dents the trust of foreign investors. The foreign direct investments fell by 29 percent to EUR 620 million in the first quarter.
“2012 will bring in Romania the most severe drought in the last five years, with immediate negative effects on the economic growth and inflation. Aside from this, the external climate remains adverse and the trust of companies and consumers in the Euro zone is not signaling a recovery,” said Eugen Sinca, analyst in the Macro Research and Fixed Income Titles team at BCR, quoted by Agerpres newswire. He is one of the authors of a research paper on the Romanian economy published this week by the Austrian lender.
The difficult year for agriculture forced the Ponta Government to cut its estimate for economic growth by 0.3 percent to 1.2 percent of GDP. The Romanian economy moved up by 0.5 percent in the second quarter, making it the fourth largest gain in the EU.
BCR estimates the Romanian economy will move up by 1.9 percent of GDP next year, from a previous forecast of 2.9 percent. However, the potential of growth in the coming years come under pressure form the low absorption of EU funds. At present, the country has taken in less than a quarter in all the fields where EU funds are available.
Sinca outlined that the domestic economy remains tightly linked with the Euro zone, which saw its output drop by 0.2 percent in the second quarter.
“Approximately 20 percent of Romanian exports go in the Euro zone and over 80 percent of foreign direct investments come from these countries,” said the BCR analyst.
Romanian inflation and deficit face derailment risk
BCR notes the inflation may go above the 4 percent target set by the National Bank of Romania this year, although the central bank will use all the instruments available to keep it below this level. The key interest rate is forecasted to remain frozen at 5.25 percent.
Romania may prepare a bond issuance this autumn to consolidate its forex reserves and to ease yields on bonds in the last trimester. However, BCR analysts put this as wishful thinking, because investors’ sentiment remains subdued.
BCR sees the Romanian currency RON remain in the 4.4 – 4.6 braket for one euro by year end.
The analysts argue that the upcoming parliamentary elections may lead to a fiscal slippage that will widen the deficit target by 0.8 percent to 3 percent of GDP in ESA 95 terms.
The country achieved a target deficit of 1.12 percent in the first semester, but this was possible because the government reduced the investments program and delayed to pay suppliers.