Bancherul - BANCI / ENGLISH / BCR: Romanian economy will advance by a shy 0.7% in 2012

Romanian bank BCR economists see the local economy advancing by a
shy 0.7% this year, trailing behind its potential in the coming years.

"We have also revised down the growth outlook to 1.9% for 2013, from
an initial 2.9%, mainly due to high uncertainties in the Eurozone (the main
trading partner of Romania), which will hold back investors from priming the pump. The current account deficit will remain below 5%, which is not negligible when considering the low rates of economic advance. But to remain on the investment map, Romania needs at least one key ally: political stability. And we all know that stability is closely related to predictability", they said in a report.

The patchy recovery Romania has seen so far, coupled with treacherous market conditions, both domestic and external, have led us to lower the growth outlook for the country in the short and medium term, said BCR in a report.

It is not that we have been optimistic, but that the often invoked downside risks have begun to materialize. It is important to remember that Romania has so far seen only a patchy recovery and one should bear in mind that the country is well below its potential, currently estimated at around 2%.

The European context remains torn apart by the sovereign debt crisis and - what is more worrisome - there is no light at the end of the tunnel, at least as yet. Confidence is at rock bottom in the Eurozone, while its downturn is likely to continue into the third quarter. Around 50% of Romanian exports are bound for the Eurozone, while more than 80% of foreign direct investments (FDIs) are originated by countries belonging to this area.

On the domestic side, the recent political turmoil is expected to eat away at foreign investors’ confidence, which is already affected by the European crisis. The capital transmission channel is taking the brunt and the 29% decrease in FDIs down to a mere EUR 620mn in 1H12 speaks for itself.

What is more, Romania is in the middle of an ongoing fiscal consolidation
process and the socialist-liberal cabinet looks keener to increase public
wages in an election year at the expense of infrastructure projects – public CAPEX saw a sudden cumulated downshift in June (-0.8% y/y, from more than 33% in the first five months).

Exports have slowed down quickly to just 1% y/y in the first six months of this year, from 20.5% y/y last December, whereas exports to the Eurozone are teetering around zero growth. Industry has almost screeched to a halt in the first six months (+0.2%) and domestic demand for industrial products is struggling to fly the flag, but that is just not enough.

Romania should put its best foot forward in attracting non-debt-creating capital sources, mainly FDIs, EU funds, proceeds from privatization, etc., with a view to boosting the quality and marketability of its products and thus the export capacity.

See here the full report